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BWBMn.com | 952.893.6868
member fdic
Bridgewater
Bancshares, Inc.
2
0
1
8
156192CVR_r1.indd 1-3
2/28/19 4:49 PM
Bridgewater was created from the idea
that the best bank to serve a successful
and energized group of clients would be
one that was built by experienced bankers
with an entrepreneurial perspective.
LEADERSHIP Guiding the company
Board of Directors
JERRY BAACK
chairman, chief executive officer and president
james johnson
Franchise owner flagship marketing, inc., regional franchise developer at express services, inc.
david juran
Executive vice president of Dougherty & company LLC
doug parish
Former senior vice president and chief compliance officer of ameriprise financial, inc.
jeffrey shellberg
Secretary, Executive vice president and chief credit officer
thomas trutna
President and founder of big ink
todd urness
Shareholder at winthrop & weinstine, P.a.
david volk
Principal at castle creek capital
Strategic leadership team
JERRY BAACK
chairman, chief executive officer and president
joe chybowski
senior vice president and chief financial officer
mary jayne crocker
Executive vice president and chief operating officer
Nick place
senior vice president and Chief lending officer
lisa salazar
Senior vice president deposit services and emerging products
Jeffrey shellberg
secretary, Executive vice president and chief credit officer
156192CVR_r1.indd 4-6
2/28/19 4:49 PM
fellow shareholders, It is a pleasure to provide the 2018 annual report for Bridgewater Bancshares, Inc. We are pleased to share Bridgewater’s continued story of growth, profitability and efficiency. In 2018, we focused on building capital - an exciting journey during which we completed an initial public offering (IPO) of our stock, which is now listed on the Nasdaq with a ticker symbol of “BWB.” We have always been grateful for solid partnerships with clients, shareholders and vendors, and this year we have developed relationships with additional investors in connection with our IPO. This active network provides the foundation for our business to prosper. We look forward to building on the momentum that shareholders, team members and clients have helped create. Our financial results surpassed expectations and year-over-year results showed considerable growth. We posted financial returns in 2018 with higher earnings than any of the previous thirteen years. Our assets grew to $1.97 billion and our deposits and loans have grown at a pace that measures well into the double digits. We have seamlessly integrated the costs associated with being a publicly traded company and continue to operate as one of the most efficient banks in the country. In keeping with our original strategic plan, Bridgewater expanded its branch footprint in 2018 by entering into the downtown St. Paul market. With the addition of a new location in St. Paul, we now have seven locations to serve clients looking to establish a relationship with a locally-led bank that provides simple solutions backed by responsive support.Bridgewater operates in an attractive geographic market with a solid demographic profile - a healthy mix of both entrepreneurial and established companies, as well as a strong local economy. The appeal of this market has spurred significant M&A activity in recent years and several regional banks entered the market changing the banking landscape. After this recent M&A activity, Bridgewater Bank has become one of the few banks with local leadership and now ranks as the 4th largest bank headquartered in Minnesota by asset size. Throughout 2018, we took advantage of this by adding experienced talent to our team. As M&A activity continues, we believe we are uniquely positioned to increase market share and capitalize on the opportunities resulting from this disruption. Since inception, Bridgewater has experienced tremendous success and we intend for this trend to continue. Recognized as the premier real estate lender in the Twin Cities, we plan to increase our market niche among seasoned real estate entrepreneurs and build out other products and services to meet the demands of our predominately commercial client base. We see opportunities in this market to expand our brand and investigate new avenues for both loan and deposit diversification. We remain committed to building shareholder value, and we intend to achieve this by delivering the same exceptional service without sacrificing earnings. As always, I remain appreciative of the efforts of the Bridgewater team: the staff, directors and shareholders. Together, we will continue to drive growth and maximize your share value. It is truly a pleasure to be building your Bank. Jerry BaackChairman of the Board 156192INSRT_r1.indd 12/28/19 4:50 PM 200820092011April: Bloomington office expansion increased to include loan productionAugust: Private placement raises $1.6 millionJanuary: Bridgewater Bank reaches profitability in its third month of operationNovember: Greenwood branch opens for businessJune: Private offering raises $5.2 millionDecember: Issued subordinated debt for $3.5 million October: Bridgewater Bank climbs to 25th largest bank in the state of Minnesota2005June: Initial offering raises $10 million in capitalNovember: Bridgewater Bank opens for business in Bloomington, MN20062007201620172018October: Bridgewater Bank recognized as one of the top 14 banks in the Twin CitiesApril: Assets surpass $1.0 billionMay: First National Bank of the Lakes opens as Bridgewater Bank June: Private equity firms invest $27.5 million July: Assets surpass $500 millionAugust: Private offering raises $8.0 millionMinneapolis downtown branch opens for businessJanuary: St. Louis Park branch opens for businessSeptember: Private equity firm invests $15 millionDecember: Agreement signed to acquire First National Bank of the LakesJuly: Bridgewater Bancshares, Inc. closes private placement of $25 million subordinated debtAssets surpass $1.5 billion201320142015March: Bridgewater Bancshares, Inc. stock is publically traded on Nasdaq Stock Market November: St. Paul branch opens for business Bridgewater Bancshares, Inc. GROWTH:It’s more than a core value. 156192INSRT_r1.indd 22/28/19 5:06 PM UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
(cid:95) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018.
OR
(cid:134) 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)
Registrant’s telephone number, including area code (952) 893-6868
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $0.01 par value
Name of each exchange on which registered
The Nasdaq Stock Market LLC
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes (cid:134) No (cid:95)
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes (cid:134) No (cid:95)
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 (cid:95) No (cid:134)
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 during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes (cid:95) No(cid:134)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. (cid:95)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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 (cid:134) Accelerated filer (cid:134)
Non-accelerated filer (cid:95)
Smaller reporting company (cid:95) Emerging growth company (cid:95)
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. (cid:134)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes (cid:134) No (cid:95)
The aggregate market value of the Common Stock held by non-affiliates of the Registrant on June 30, 2018, based on the closing price of
such shares on that date, was $323,105,884.
The number of shares of the Common Stock issued and outstanding as of February 25, 2019 was 30,097,674.
The information required by Part III is incorporated by reference to portions of the definitive proxy statement to be filed within 120 days after
December 31, 2018, pursuant to Regulation 14A under the Securities Exchange Act of 1934 in connection with the annual meeting of stockholders to
be held on April 23, 2019.
DOCUMENTS INCORPORATED BY REFERENCE
Table of Contents
PART I
Page
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 4. Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . .
Item 7A. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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18
41
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42
42
44
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72
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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . . . .
124
Item 9A. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
124
Item 9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
124
PART III
Item 10. Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
124
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
124
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters .
125
Item 13. Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . . . . . . . . . . . . . .
125
Item 14. Principal Accounting Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
125
PART IV
Item 15. Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
126
Item 16: Form 10-K Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
127
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
128
2
Forward-Looking Statements
This Annual Report on Form 10-K 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. The 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:
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loan concentrations in the loan portfolio;
the overall health of the local and national real estate market;
the ability to successfully manage credit risk;
business and economic conditions generally and in the financial services industry, nationally and within our
market area;
the ability to maintain an adequate level of allowance for loan losses;
the high concentration of large loans to certain borrowers;
the ability to successfully manage liquidity risk;
the dependence on non-core funding sources and our cost of funds;
the ability to raise additional capital to implement our business plan;
the ability to implement the Company’s growth strategy and manage costs effectively;
the composition of senior leadership team and the 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 the risk management framework;
the commencement and outcome of litigation and other legal proceedings and regulatory actions against the
Company;
the impact of recent and future legislative and regulatory changes;
interest rate risk;
fluctuations in the values of the securities held in the securities portfolio; and
changes in federal tax law or policy.
The foregoing factors should not be construed as exhaustive and should be read together with the other
cautionary statements included in this report. In addition, past results of operations are not necessarily indicative of
future results. Any forward-looking statement speaks only as of the date on which it is made, and the Company does not
3
undertake any obligation to update or review any forward-looking statements, whether as a result of new information,
future developments or otherwise.
ITEM 1. BUSINESS
Company Overview and History
PART I
Bridgewater Bancshares, Inc. (the “Company”) is a financial holding company with two wholly-owned
subsidiaries, Bridgewater Bank (the “Bank”) and Bridgewater Risk Management, Inc., a captive insurance entity. The
Bank has formed two wholly owned subsidiaries: BWB Holdings, LLC, which was formed for the purpose of holding
repossessed property; and Bridgewater Investment Management, Inc., which was formed for the purposes of holding
certain municipal securities and engaging in municipal lending activities. The Bank has seven full-service offices located
in Bloomington, Greenwood, Minneapolis (2), St. Louis Park, Orono, and St. Paul, Minnesota.
The Company is headquartered in Bloomington, Minnesota, a suburb located approximately 10 miles south of
downtown Minneapolis and in close proximity to the Minneapolis-St. Paul International Airport. The Bank was
established in 2005 as a de novo bank by a group of industry veterans and local business leaders committed to serving
the diverse needs of commercial real estate investors, small business entrepreneurs, and high net worth individuals.
Since inception, the Company has grown significantly and profitably, with a focus on organic growth, driven
primarily by commercial real estate lending. Assets have grown at a compounded annual growth rate of 36.3%, since
2005, surpassing total asset milestones of $500 million in 2013, $1.0 billion in 2016 and $1.5 billion in 2017. This
growth made the Bank the fastest growing de novo bank in the Minneapolis-St. Paul-Bloomington Metropolitan
Statistical Area, or Twin Cities MSA, over the past two decades. While this growth has been almost entirely organic, in
2016, the Company acquired First National Bank of the Lakes in a complementary small bank acquisition, which added
approximately $76.1 million in assets, $66.7 million in seasoned core deposits and two branch locations within its
market area.
As of December 31, 2018, total assets were $1.97 billion, total gross loans were $1.66 billion, total deposits
were $1.56 billion, and total shareholders’ equity was $221.0 million.
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.
Market Area and Competition
The Company operates in the Twin Cities MSA, which had total deposits of $184.8 billion as of June 30, 2018,
and ranks as the 15th largest metropolitan statistical area in the United States in total deposits, and the second largest
metropolitan statistical area in the Midwest in total deposits, based on FDIC data. This area is commonly known as the
“Twin Cities” after its two largest cities, Minneapolis, the city with the largest population in the state, and St. Paul,
which is the state capital.
The Twin Cities MSA is defined by attractive market demographics, including strong household incomes,
dense populations, low unemployment and the presence of a diverse group of large and small businesses. As of
December 31, 2018, the Company’s market ranked third in median household income in the Midwest and sixth in the
nation, when compared to the top 20 metropolitan statistical areas by population size in each area, based on data
available on S&P Global Market Intelligence. According to the U.S. Bureau of Labor Statistics, the population in the
4
Twin Cities MSA was approximately 3.6 million as of December 31, 2018, making it the third largest metropolitan
statistical area in the Midwest and 16th largest metropolitan statistical area in the United States. The low unemployment
rate of 2.0%, as of November 30, 2018, and the significant presence of national and international businesses make the
Twin Cities MSA one of the most economically vibrant and diverse markets in the country.
The Company operates in a competitive market area and competes with other, often much larger, retail and
commercial banks and financial institutions. Two large, national banking chains, Wells Fargo and US Bank, together
controlled 73.5% of the deposit market share in the Twin Cities MSA as of June 30, 2018, based on FDIC data and as
displayed in the table below. By comparison, as of the same date, the Company had a deposit market share of
approximately 0.8%, which ranked the Company ninth in the Twin Cities MSA overall and fourth in the Twin Cities
MSA among banks headquartered in Minnesota.
Rank
Institution
Headquarters
State
Branch
Count
1 . . . . . . . . . . . . . U.S. Bancorp
2 . . . . . . . . . . . . . Wells Fargo & Co
3 . . . . . . . . . . . . . TCF Financial Corp.
4 . . . . . . . . . . . . . Bremer Financial Corp.
5 . . . . . . . . . . . . . Bank of America Corp.
6 . . . . . . . . . . . . . Bank of Montreal
7 . . . . . . . . . . . . . Old National Bancorp
8 . . . . . . . . . . . . . Associated Banc-Corp
9 . . . . . . . . . . . . . Bridgewater Bancshares, Inc.
10 . . . . . . . . . . . . State Bankshares, Inc.
Top 10 Institutions
MN
CA
MN
MN
NC
N/A
IN
WI
MN
ND
100
97
85
22
9
32
36
22
7
2
412
Total
Deposits
($000)
69,574,781
66,325,245
6,600,725
4,567,722
4,212,043
4,014,631
3,230,673
1,677,752
1,461,260
1,056,332
162,721,164
Market
Share
(%)
37.64
35.89
3.57
2.47
2.28
2.17
1.74
0.91
0.79
0.57
88.03
Total Bank Deposits
785
184,819,349
The market has also experienced disruption in recent years due to acquisitions of local institutions by larger
regional banks headquartered outside of the market. The Company seeks to attract customers by offering a higher level
of responsiveness and by providing a more tailored array of products and services than larger competitors.
Products and Services
The Company offers a full array of simple, quality loan and deposit products primarily for commercial clients.
While the Company provides products and services that compete with those offered by our large, national and regional
competitors, the Company additionally offers responsive support and personalized solutions tailored for each client. The
Company emphasizes customer service over price, and believes in providing distinguishing levels of client service
through the experience of employees, the responsiveness and certainty of the credit process and the efficiency with
which business is conducted. The Company believes that clients notice a difference in service compared to the much
larger institutions in our market. The Company has built a strong referral network that continually provides opportunities
with new client relationships. At this time, the Company does not operate any non-depository business lines such as
mortgage, wealth management or trust.
Lending. The Bank focuses primarily on commercial lending, consisting of loans secured by nonfarm,
nonresidential properties, loans secured by multifamily residential properties, construction loans, land development loans
and commercial and industrial loans. The Bank has a particular niche in multifamily financing which has historically
represented approximately 20-25% of the loan portfolio. This asset class has performed extremely well and has lower
historical loss rates when compared to other loan types. Commercial real estate loans (excluding multifamily and
construction) consist of owner and nonowner occupied properties. This portfolio segment is well diversified with loans
secured by office buildings, retail strip centers, industrial properties, senior housing, hospitality and mixed-use
properties. In addition to loans secured by improved commercial real estate properties, the Bank engages in construction
5
lending, which includes single family residential construction loans, land development, finished lots and raw land loans,
and commercial and multifamily construction.
In recent years, the Bank has increased its commercial and industrial lending. This portfolio includes a mix of
term equipment loans, revolving lines of credit and lease transactions to support the needs of local businesses.
Additionally, the Bank has a niche within the tax credit investment market whereby it bridges equity capital receivables
on various tax credit projects.
The Bank focuses on lending to borrowers located or investing in the Twin Cities MSA across a diverse range
of industries and property types. The Bank does not generally lend outside of its market, however, as a relationship
lender, it will, from time to time, finance properties located outside of Minnesota for its existing customers in select
situations.
Growth over the last several years has been partially attributable to the Bank’s ability to cultivate relationships
with certain individuals and businesses that have resulted in a concentration of large loans to a small number of
borrowers. The Bank has established an informal, internal limit on loans to one borrower, principal or guarantor, but
may, under certain circumstances, consider going above this internal limit in situations where management’s
understanding of the industry, the borrower’s business and the credit quality of the borrower are commensurate with the
increased size of the relationship.
Deposits. The Bank has developed a suite of deposit products targeted at commercial clients, including a
variety of remote deposit and cash management products, along with commercial transaction accounts. The Bank also
offers consumers traditional retail deposit products through the branch network, along with online, mobile and direct
banking channels. Many of the deposits do not require a branch visit, creating efficiencies across the Bank’s branch
network.
The Bank has developed relationships with certain individuals and businesses that have resulted in a
concentration of large deposits from a small number of clients. As of December 31, 2018, the 10 largest depositor
relationships accounted for approximately 18.1% of total deposits. This high concentration of depositors presents a risk
to liquidity if one or more of them decides to change its relationship with the Bank and to withdraw all or a significant
portion of their accounts.
While the Bank is committed to growing core deposits, brokered deposits are used as a strategic component of
the funding strategy and interest rate risk management. The Bank’s Asset Liability Management, or ALM, Committee
monitors the size of this portfolio. As core deposits have grown, brokered deposits have remained a consistent part of the
portfolio.
Competitive Strengths
As the Company seeks to continue to grow the business, the following strengths are believed to provide a
competitive advantage over other financial institutions operating in its market area:
Commercial Banking Expertise. Management believes we have earned the reputation as one of the prominent
commercial real estate lenders in the Twin Cities MSA due in large part to the strength of the lending team. The
Company has an experienced, professional team of 17 commercial lenders, and believes the ability to drive quality,
commercial loan growth is a result of being able to provide each client with access to a knowledgeable, experienced and
dedicated banker. Due to their market knowledge and understanding of clients’ businesses, the lenders are well
positioned to provide timely and relevant feedback to clients. Management believes the responsive credit culture
separates us from competitors.
Multifamily Lending Niche. The Company specializes in multifamily lending, which typically represents
between 20% to 25% of the total loan portfolio. This lending niche lowers the risk profile of the overall loan portfolio
due to its lower historical loss rates when compared to other loan types.
6
Engaged and Experienced Board of Directors and Management Team. The Company’s board of directors
consists of highly accomplished individuals with strong industry and business experience in the market area. The
combined expertise of the board of directors and the significant banking and regulatory experience of the strategic
leadership team help execute the Company’s growth strategy.
The Company’s six-person strategic leadership team has a strong balance of extensive banking and regulatory
experience, drive and talent. The team has over 125 years of combined banking and financial services experience and
more than 20 years of regulatory experience. Three members of the team have been leading the Bank since its formation,
and with an average age of 46, this group can drive growth and strategy for years to come.
In addition to the strategic leadership team, the Company has demonstrated an ability to grow through the
recruitment of high performing individuals. The Company seeks to hire people with significant in-market experience
who fit the Company’s hard-working, driven culture. Through targeted hiring and internal development efforts, the
Company has established a deep bench of talent to continue to grow and manage business. The Company has structured
its team to prepare for long-term growth and stability by combining the experienced strategic leadership and commercial
lending teams with its next generation of leaders.
Efficiency. The Company operates as an efficient organization based on a simple business model. By focusing
on commercial real estate lending, employee overhead is low due to the increased loan portfolio sizes of lenders
compared to smaller loan portfolio sizes related to other types of commercial lending. In addition, the Company serves
its clients through a strategically positioned branch model, as well as through online, mobile and direct banking
channels, and is not dependent on a traditional branch network with a large number of locations.
Hard-Working and Entrepreneurial Culture. The Company has developed a hard-working and entrepreneurial
culture, which is a critical component for attracting and retaining experienced and talented bankers, as well as clients.
The Company has established a set of core values, based on characteristics that describe and inspire the culture—
unconventional, responsive, dedicated, focused on growth and accurate. To maintain the culture, all potential and current
personnel evaluations include an assessment of these attributes. Clients notice the unconventional environment with
dedicated employees who feel like they are part of building a high performing community bank.
Solid Asset Quality Metrics. A risk-management focused business model has contributed to strong asset quality
during a period of strong loan growth. The Company diligently monitors and routinely stress tests the loan portfolio. The
strong credit metrics are the result of prudent underwriting standards, experienced lenders and close ties to and
knowledge of clients, as well as the currently strong economic environment in the market.
Proactive Enterprise Risk Management. The Company’s enterprise risk management practices provide an
enhanced level of oversight allowing management to be proactive rather than reactive. The Bank-level risk committee,
comprised of senior representatives from all departments, meets bi-monthly to review the Bank’s overall enterprise risk
position and to discuss how the Bank’s strategic initiatives may impact the Bank’s risk profile. Enterprise risk
management reports are provided to the full Bank board on a quarterly basis. In 2016, Bridgewater Risk
Management, Inc. was formed as a captive insurance subsidiary to provide supplemental insurance coverage to the
Company and its subsidiaries for risk management purposes.
The Company also has a comprehensive Commercial Real Estate Portfolio Risk Management Policy which
implements formal processes and procedures designed to manage and mitigate risk within the commercial real estate
portfolio. This policy addresses regulatory guidelines for institutions, such as the Bank, that exhibit higher levels of
commercial real estate concentrations. These processes and procedures include board and management oversight,
commercial real estate exposure limits, portfolio monitoring tools, management information systems, market reports,
underwriting standards, a credit risk review function and periodic stress testing to evaluate potential credit risk and the
subsequent impact on capital and earnings.
7
Strategies for Growth
To generate future growth, the Company intends to continue to execute the strategies that it has used over the
past 13 years to achieve some of the strongest performance results in the community banking industry. These strategies
include the following:
Focus on Organic Growth in the Market Area. The Company intends to continue to grow its business
organically in a focused and strategic manner by leveraging its competitive strengths, including commercial banking
expertise, an experienced management team, an efficient business model and strong branding, to capitalize on the
opportunities in the Company’s market area. As a publicly traded but locally-headquartered community bank, the
Company can go beyond what the small banks can provide by offering the same sophisticated products and services as
the much larger, out-of-state banks, but in a manner that is tailored to the needs of local clients in a more efficient,
responsive and flexible way. Although the Company may in the future identify new markets to enter, the long-term
growth potential of the current market is substantial and provides the ability to continue to grow organically in the
market.
The Company plans to increase core deposits and build market share by expanding existing client relationships
and by developing new deposit-focused clients. The Company plans to continue to expand its footprint through
marketing and networking efforts focused on generating deposits. Although the Company is committed to growing core
deposits, growth will continue to be supplemented, when necessary, with non-core, wholesale funding sources. On the
lending side, the Company intends to rely on the commercial real estate lending expertise of the lenders, and believes the
Company is well-positioned to continue to organically grow commercial loans based on the favorable market
demographics in the Twin Cities MSA.
Leverage Entrepreneurial Culture and Talent. The Company has built a team of bankers that is hard-working,
passionate and energized by the opportunities to continue to grow the Company’s business and develop its brand in the
Twin Cities MSA. With an experienced strategic leadership team and a strong layer of talented middle managers, the
Company is well positioned for future growth. The Company aggressively recruits qualified personnel and develops
talent internally and believes the culture, which empowers employees to be entrepreneurs for the business, will allow the
Company to attract and develop the talent needed to drive growth.
Consider Opportunistic Acquisitions. In addition to organic growth, from time to time, the Company may
consider additional acquisition opportunities that fit with the organization. Specifically, the Company will evaluate
acquisitions that would be complementary to its existing business. The Company will continue to seek acquisitions that
will bolster its balance sheet in areas where the Company would like to grow or diversify, without compromising the
Company’s risk profile or culture. While pursuing acquisitions that fit, the Company intends to be disciplined in its
approach to pricing and will not generally look to acquire new business lines or sellers located in new markets. In the
future, the Company may evaluate and act upon acquisition opportunities that would produce attractive returns for
shareholders. Management believes that there will be further bank consolidation in the Twin Cities MSA and that the
Company is well positioned to be a preferred partner for smaller institutions looking to exit through a sale to an
in-market buyer.
Supervision and Regulation
General
FDIC-insured institutions, their holding companies and their affiliates are extensively regulated under federal
and state law. As a result, the Company’s growth and earnings performance may be affected not only by management
decisions and general economic conditions, but also by the requirements of federal and state statutes and by the
regulations and policies of various bank regulatory agencies, including the Minnesota Department of Commerce,
Financial Institutions Division, or MFID; the Federal Reserve; the FDIC; and the Consumer Financial Protection Bureau
or CFPB. Furthermore, taxation laws administered by the Internal Revenue Service and state taxing authorities,
accounting rules developed by the Financial Accounting Standards Board, securities laws administered by the Securities
and Exchange Commission, or SEC, and state securities authorities, and anti-money laundering laws enforced by the
8
U.S. Department of the Treasury, or Treasury, have an impact on the Company’s business. The effect of these statutes,
regulations, regulatory policies and accounting rules are significant to the Company’s operations and results.
Federal and state banking laws impose a comprehensive system of supervision, regulation and enforcement on
the operations of FDIC-insured institutions, their holding companies and affiliates that is intended primarily for the
protection of the FDIC-insured deposits and depositors of banks, rather than shareholders. These laws, and the
regulations of the bank regulatory agencies issued under them, affect, among other things, the scope of the Company’s
business, the kinds and amounts of investments the Company and the Bank may make, reserve requirements, required
capital levels relative to assets, the nature and amount of collateral for loans, the establishment of branches, the ability to
merge, consolidate and acquire, dealings with the Company’s and the Bank’s insiders and affiliates and the Company’s
payment of dividends. In reaction to the global financial crisis and particularly following the passage of the Dodd-Frank
Act, the Company experienced heightened regulatory requirements and scrutiny. Although the reforms primarily
targeted systemically important financial service providers, their influence filtered down in varying degrees to
community banks over time and caused the Company’s compliance and risk management processes, and the costs
thereof, to increase. After the 2016 federal elections, momentum to decrease the regulatory burden on community banks
gathered strength. In May 2018, the Economic Growth, Regulatory Relief and Consumer Protection Act of 2018, or
Regulatory Relief Act, was enacted to modify or remove certain financial reform rules and regulations. While the
Regulatory Relief Act maintains most of the regulatory structure established by the Dodd-Frank Act, it amends certain
aspects of the regulatory framework for small depository institutions with assets of less than $10 billion, like the
Company, and for large banks with assets of more than $50 billion. Many of these changes are intended to result in
meaningful regulatory relief for community banks and their holding companies, including new rules that may make the
capital requirements less complex. For a discussion of capital requirements, see “—The Role of Capital.” It also
eliminated questions about the applicability of certain Dodd-Frank Act reforms to community bank systems, including
relieving the Bank of any requirement to engage in mandatory stress tests or comply with the Volcker Rule’s
complicated prohibitions on proprietary trading and ownership of private funds. The Company believes these reforms
are favorable to its operations, but the true impact remains difficult to predict until rulemaking is complete and the
reforms are fully implemented.
The supervisory framework for U.S. banking organizations subjects banks and bank holding companies to
regular examination by their respective regulatory agencies, which results in examination reports and ratings that are not
publicly available and that can impact the conduct and growth of their business. These examinations consider not only
compliance with applicable laws and regulations, but also capital levels, asset quality and risk, management ability and
performance, earnings, liquidity, and various other factors. The regulatory agencies generally have broad discretion to
impose restrictions and limitations on the operations of a regulated entity where the agencies determine, among other
things, that such operations are unsafe or unsound, fail to comply with applicable law or are otherwise inconsistent with
laws and regulations.
The following is a summary of the material elements of the supervisory and regulatory framework applicable to
the Company and the Bank, beginning with a discussion of the continuing regulatory emphasis on the Company’s capital
levels. It does not describe all of the statutes, regulations and regulatory policies that apply, nor does it restate all of the
requirements of those that are described. The descriptions are qualified in their entirety by reference to the particular
statutory and regulatory provision.
The Role of Capital
Regulatory capital represents the net assets of a banking organization available to absorb losses. Because of the
risks attendant to their business, FDIC-insured institutions are generally required to hold more capital than other
businesses, which directly affects the Company’s earnings capabilities. While capital has historically been one of the key
measures of the financial health of both bank holding companies and banks, its role became fundamentally more
important in the wake of the global financial crisis, as the banking regulators recognized that the amount and quality of
capital held by banks prior to the crisis was insufficient to absorb losses during periods of severe stress. Certain
provisions of the Dodd-Frank Act and Basel III, discussed below, establish capital standards for banks and bank holding
companies that are meaningfully more stringent than those in place previously.
Minimum Required Capital Levels. Banks have been required to hold minimum levels of capital based on
guidelines established by the bank regulatory agencies since 1983. The minimums have been expressed in terms of ratios
of “capital” divided by “total assets.” As discussed below, bank capital measures have become more sophisticated over
9
the years and have focused more on the quality of capital and the risk of assets. Bank holding companies have
historically had to comply with less stringent capital standards than their bank subsidiaries and have been able to raise
capital with hybrid instruments such as trust preferred securities. The Dodd-Frank Act mandated the Federal Reserve to
establish minimum capital levels for holding companies on a consolidated basis as stringent as those required for FDIC-
insured institutions.
The Basel International Capital Accords. The risk-based capital guidelines for U.S. banks since 1989 were
based upon the 1988 capital accord known as “Basel I” adopted by the international Basel Committee on Banking
Supervision, a committee of central banks and bank supervisors that acts as the primary global standard-setter for
prudential regulation, as implemented by the U.S. bank regulatory agencies on an interagency basis. The accord
recognized that bank assets for the purpose of the capital ratio calculations needed to be assigned risk weights (the theory
being that riskier assets should require more capital) and that off-balance sheet exposures needed to be factored in the
calculations. Basel I had a very simple formula for assigning risk weights to bank assets from 0% to 100% based on four
categories. In 2008, the banking agencies collaboratively began to phase-in capital standards based on a second capital
accord, referred to as “Basel II,” for large or “core” international banks (generally defined for U.S. purposes as having
total assets of $250 billion or more, or consolidated foreign exposures of $10 billion or more) known as “advanced
approaches” banks. The primary focus of Basel II was on the calculation of risk weights based on complex models
developed by each advanced approaches bank. Because most banks were not subject to Basel II, the U.S. bank regulators
worked to improve the risk sensitivity of Basel I standards without imposing the complexities of Basel II. This
“standardized approach” increased the number of risk-weight categories and recognized risks well above the original
100% risk weight. It is institutionalized by the Dodd-Frank Act for all banking organizations, even for the advanced
approaches banks, as a floor.
On September 12, 2010, the Group of Governors and Heads of Supervision, the oversight body of the Basel
Committee on Banking Supervision, announced agreement on a strengthened set of capital requirements for banking
organizations around the world, known as Basel III, to address deficiencies recognized in connection with the global
financial crisis.
The Basel III Rule. In July 2013, the U.S. bank regulatory agencies approved the implementation of the Basel
III regulatory capital reforms in pertinent part, and, at the same time, promulgated rules effecting certain changes
required by the Dodd-Frank Act (the “Basel III Rule”). In contrast to capital requirements historically, which were in
the form of guidelines, Basel III was released in the form of enforceable regulations by each of the regulatory agencies.
The Basel III Rule is applicable to all banking organizations that are subject to minimum capital requirements, including
federal and state banks and savings and loan associations, as well as to bank and savings and loan holding companies,
other than “small bank holding companies” who are relieved from compliance with the Basel III Rule. While holding
companies with consolidated assets of less than $3 billion, like the Company, are considered small bank holding
companies for this purpose, the Company has securities registered with the SEC and that disqualifies the Company from
taking advantage of the relief. Banking organizations became subject to the Basel III Rule on January 1, 2015 and its
requirements were fully phased-in as of January 1, 2019.
The Basel III Rule increased the required quantity and quality of capital and, for nearly every class of assets, it
requires a more complex, detailed and calibrated assessment of risk and calculation of risk-weight amounts.
Not only did the Basel III Rule increase most of the required minimum capital ratios in effect prior to January 1,
2015, but it introduced the concept of Common Equity Tier 1 Capital, which consists primarily of common stock, related
surplus (net of Treasury stock), retained earnings, and Common Equity Tier 1 minority interests subject to certain
regulatory adjustments. The Basel III Rule also changed the definition of capital by establishing more stringent criteria
that instruments must meet to be considered Additional Tier 1 Capital (primarily non-cumulative perpetual preferred
stock that meets certain requirements) and Tier 2 Capital (primarily other types of preferred stock and subordinated debt,
subject to limitations). A number of instruments that qualified as Tier 1 Capital under Basel I do not qualify, or their
qualifications changed. For example, noncumulative perpetual preferred stock, which qualified as simple Tier 1 Capital
under Basel I, does not qualify as Common Equity Tier 1 Capital, but qualifies as Additional Tier 1 Capital. The Basel
III Rule also constrained the inclusion of minority interests, mortgage-servicing assets, and deferred tax assets in capital
and requires deductions from Common Equity Tier 1 Capital in the event that such assets exceed a certain percentage of
a banking institution’s Common Equity Tier 1 Capital.
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The Basel III Rule required minimum capital ratios as of January 1, 2015, as follows:
• A ratio of minimum Common Equity Tier 1 Capital equal to 4.5% of risk-weighted assets;
• An increase in the minimum required amount of Tier 1 Capital from 4% to 6% of risk-weighted assets;
• A continuation of the minimum required amount of Total Capital (Tier 1 plus Tier 2) at 8% of risk-
weighted assets; and
• A minimum leverage ratio of Tier 1 Capital to total quarterly average assets equal to 4% in all
circumstances.
In addition, institutions that seek the freedom to make capital distributions (including for dividends and
repurchases of stock) and pay discretionary bonuses to executive officers without restriction must also maintain 2.5% in
Common Equity Tier 1 Capital attributable to a capital conservation buffer (fully phased-in as of January 1, 2019). The
purpose of the conservation buffer is to ensure that banking institutions maintain a buffer of capital that can be used to
absorb losses during periods of financial and economic stress. Factoring in the conservation buffer increases the
minimum ratios depicted above to 7% for Common Equity Tier 1 Capital, 8.5% for Tier 1 Capital and 10.5% for Total
Capital.
Well-Capitalized Requirements. The ratios described above are minimum standards in order for banking
organizations to be considered “adequately capitalized.” Bank regulatory agencies uniformly encourage banks to hold
more capital and be “well-capitalized” and, to that end, federal law and regulations provide various incentives for
banking organizations to maintain regulatory capital at levels in excess of minimum regulatory requirements. For
example, a banking organization that is well-capitalized may: (i) qualify for exemptions from prior notice or application
requirements otherwise applicable to certain types of activities; (ii) qualify for expedited processing of other required
notices or applications; and (iii) accept, roll-over or renew brokered deposits. Higher capital levels could also be required
if warranted by the particular circumstances or risk profiles of individual banking organizations. For example, the
Federal Reserve’s capital guidelines contemplate that additional capital may be required to take adequate account of,
among other things, interest rate risk, or the risks posed by concentrations of credit, nontraditional activities or securities
trading activities. Further, any banking organization experiencing or anticipating significant growth would be expected
to maintain capital ratios, including tangible capital positions (i.e., Tier 1 Capital less all intangible assets), well above
the minimum levels.
Under the capital regulations of the FDIC and Federal Reserve, in order to be well-capitalized, a banking
organization must maintain:
• A Common Equity Tier 1 Capital ratio to risk-weighted assets of 6.5% or more;
• A ratio of Tier 1 Capital to total risk-weighted assets of 8% or more (6% under Basel I);
• A ratio of Total Capital to total risk-weighted assets of 10% or more (the same as Basel I); and
• A leverage ratio of Tier 1 Capital to total adjusted average quarterly assets of 5% or greater.
It is possible under the Basel III Rule to be well-capitalized while remaining out of compliance with the capital
conservation buffer discussed above.
As of December 31, 2018: (i) the Bank was not subject to a directive from MFID or FDIC to increase its
capital; and (ii) the Bank was well-capitalized, as defined by FDIC regulations. As of December 31, 2018, the Company
had regulatory capital in excess of the Federal Reserve’s requirements and met the Basel III Rule requirements to be
well-capitalized.
Prompt Corrective Action. The concept of an institution being “well-capitalized” is part of a regulatory
enforcement regime that provides the federal banking regulators with broad power to take “prompt corrective action” to
resolve the problems of institutions based on the capital level of each particular institution. The extent of the regulators’
powers depends on whether the institution in question is “adequately capitalized,” “undercapitalized,” “significantly
undercapitalized” or “critically undercapitalized,” in each case as defined by regulation. Depending upon the capital
category to which an institution is assigned, the regulators’ corrective powers include: (i) requiring the institution to
submit a capital restoration plan; (ii) limiting the institution’s asset growth and restricting its activities; (iii) requiring the
11
institution to issue additional capital stock (including additional voting stock) or to sell itself; (iv) restricting transactions
between the institution and its affiliates; (v) restricting the interest rate that the institution may pay on deposits;
(vi) ordering a new election of directors of the institution; (vii) requiring that senior executive officers or directors be
dismissed; (viii) prohibiting the institution from accepting deposits from correspondent banks; (ix) requiring the
institution to divest certain subsidiaries; (x) prohibiting the payment of principal or interest on subordinated debt; and
(xi) ultimately, appointing a receiver for the institution.
The Potential for Community Bank Capital Simplification. Community banks have long raised concerns with
bank regulators about the regulatory burden, complexity, and costs associated with certain provisions of the Basel III
Rule. In response, Congress provided a potential Basel III “alternative” for institutions, like the Company, with total
consolidated assets of less than $10 billion. Section 201 of the Regulatory Relief Act instructed the federal banking
regulators to establish a single "Community Bank Leverage Ratio,” or CBLR, of between 8 and 10%. On November 21,
2018, the agencies proposed setting the CBLR at 9% of tangible equity to total assets for a qualifying bank to be well-
capitalized. Under the proposal, a community banking organization would be eligible to elect the new framework if it
has less than $10 billion in total consolidated assets, limited amounts of certain assets and off-balance sheet exposures,
and a CBLR greater than 9%. The electing institution would not be required to calculate the existing risk-based and
leverage capital requirements of the Basel III Rule and would not need to risk weight its assets for purposes of capital
calculations.
The Company is in the process of considering the Federal Reserve’s CBLR proposal and will await the final
regulation to determine whether it will elect the framework.
Supervision and Regulation of the Company
General. The Company, as the sole shareholder of the Bank, is a bank holding company. As a bank holding
company, the Company is registered with, and is subject to regulation supervision and enforcement by, the Federal
Reserve under the Bank Holding Company Act, or BHCA. The Company is legally obligated to act as a source of
financial strength to the Bank and to commit resources to support the Bank in circumstances where the Company might
not otherwise do so. Under the BHCA, the Company is subject to periodic examination by the Federal Reserve. The
Company is required to file with the Federal Reserve periodic reports of the Company’s operations and such additional
information regarding the Company and its subsidiaries as the Federal Reserve may require.
Acquisitions, Activities and Financial Holding Company Election. The primary purpose of a bank holding
company is to control and manage banks. The BHCA generally requires the prior approval of the Federal Reserve for
any merger involving a bank holding company or any acquisition by a bank holding company of another bank or bank
holding company. Subject to certain conditions (including deposit concentration limits established by the BHCA), the
Federal Reserve may allow a bank holding company to acquire banks located in any state of the United States. In
approving interstate acquisitions, the Federal Reserve is required to give effect to applicable state law limitations on the
aggregate amount of deposits that may be held by the acquiring bank holding company and its FDIC-insured institution
affiliates in the state in which the target bank is located (provided that those limits do not discriminate against out-of-
state institutions or their holding companies) and state laws that require that the target bank have been in existence for a
minimum period of time (not to exceed five years) before being acquired by an out-of-state bank holding company.
Furthermore, in accordance with the Dodd-Frank Act, bank holding companies must be well-capitalized and well-
managed in order to effect interstate mergers or acquisitions. For a discussion of the capital requirements, see “--The
Role of Capital” above.
The BHCA generally prohibits the Company from acquiring direct or indirect ownership or control of more
than 5% of the voting shares of any company that is not a bank and from engaging in any business other than that of
banking, managing and controlling banks or furnishing services to banks and their subsidiaries. This general prohibition
is subject to a number of exceptions. The principal exception allows bank holding companies to engage in, and to own
shares of companies engaged in, certain businesses found by the Federal Reserve prior to November 11, 1999 to be “so
closely related to banking ... as to be a proper incident thereto.” This authority permits the Company to engage in a
variety of banking-related businesses, including the ownership and operation of a savings association, or any entity
engaged in consumer finance, equipment leasing, the operation of a computer service bureau (including software
development) and mortgage banking and brokerage services. The BHCA does not place territorial restrictions on the
domestic activities of nonbank subsidiaries of bank holding companies.
12
Additionally, bank holding companies that meet certain eligibility requirements prescribed by the BHCA and
elect to operate as financial holding companies may engage in, or own shares in companies engaged in, a wider range of
nonbanking activities, including securities and insurance underwriting and sales, merchant banking and any other
activity that the Federal Reserve, in consultation with the Secretary of the Treasury, determines by regulation or order is
financial in nature or incidental to any such financial activity or that the Federal Reserve determines by order to be
complementary to any such financial activity and does not pose a substantial risk to the safety or soundness of FDIC-
insured institutions or the financial system generally. The Company has elected to operate as a financial holding
company. In order to maintain its status as a financial holding company, the Company and the Bank must be well-
capitalized, well-managed, and the Bank must have a least a satisfactory Community Reinvestment Act, or CRA, rating.
If the Federal Reserve determines that a financial holding company is not well-capitalized or well-managed, that
company has a period of time in which to achieve compliance, but during the period of noncompliance, the Federal
Reserve may place any limitations on the company it believes to be appropriate. Furthermore, if the Federal Reserve
determines that a financial holding company’s subsidiary bank has not received a satisfactory CRA rating, that company
will not be able to commence any new financial activities or acquire a company that engages in such activities.
Change in Control. Federal law also prohibits any person or company from acquiring “control” of an FDIC-
insured depository institution or its holding company without prior notice to the appropriate federal bank regulator.
“Control” is conclusively presumed to exist upon the acquisition of 25% or more of the outstanding voting securities of a
bank or bank holding company, but may arise under certain circumstances between 10% and 24.99% ownership.
Capital Requirements. The Company has been subject to the complex consolidated capital requirements of the
Basel III Rule since the U.S. bank regulatory agencies approved its implementation effective January 1, 2015. Only
qualifying small bank holding companies were excluded from compliance with the Basel III Rule by virtue of the
Federal Reserve’s “Small Bank Holding Company Policy Statement”. Prior to 2018, the Company’s assets were in
excess of the maximum permitted in the definition of a small bank holding company for this purpose; however, the
Regulatory Relief Act expanded the category of holding companies that may rely on the policy statement by raising the
maximum amount of assets they may hold to $3 billion, and the Federal Reserve issued an interim final rule, effective
August 30, 2018, to bring the policy statement in line with the law. As a result, qualifying holding companies with assets
of less than $3 billion are not subject to the capital requirements of the Basel III Rule and are deemed to be “well-
capitalized”. However, one of the qualifications for this treatment is that the holding company not have securities
registered with the SEC. The Company is a publicly reporting company and has shares registered with the SEC. As
such, the Company does not meet the qualifications of the Small Bank Holding Company Policy Statement. For a
discussion of capital requirements, see “—the “Role of Capital” above.
Dividend Payments. The Company’s ability to pay dividends to its shareholders may be affected by both
general corporate law considerations and policies of the Federal Reserve applicable to bank holding companies. As a
Minnesota corporation, the Company is subject to the Minnesota Business Corporation Act, as amended, which prohibits
the Company from paying a dividend if, after giving effect to the dividend the Company would not be able to pay its
debts as the debts become due in the ordinary course of business, or the Company’s total assets would be less than the
sum of its total liabilities plus, the amount that would be needed, if the Company were to be dissolved at the time of the
distribution, to satisfy the preferential rights upon dissolution of shareholders whose preferential rights are superior to
those receiving the distribution.
As a general matter, the Federal Reserve has indicated that the board of directors of a bank holding company
should eliminate, defer or significantly reduce dividends to shareholders if: (i) the company’s net income available to
shareholders for the past four quarters, net of dividends previously paid during that period, is not sufficient to fully fund
the dividends; (ii) the prospective rate of earnings retention is inconsistent with the company’s capital needs and overall
current and prospective financial condition; or (iii) the company will not meet, or is in danger of not meeting, its
minimum regulatory capital adequacy ratios. The Federal Reserve also possesses enforcement powers over bank holding
companies and their nonbank subsidiaries to prevent or remedy actions that represent unsafe or unsound practices or
violations of applicable statutes and regulations. Among these powers is the ability to proscribe the payment of
dividends by banks and bank holding companies. In addition, under the Basel III Rule, institutions that seek the freedom
to pay dividends have to maintain a 2.5% buffer in Common Equity Tier 1 Capital attributable to the capital
conservation buffer. See “—The Role of Capital” above.
Monetary Policy. The monetary policy of the Federal Reserve has a significant effect on the operating results of
financial or bank holding companies and their subsidiaries. Among the tools available to the Federal Reserve to affect
13
the money supply are open market transactions in U.S. government securities, changes in the discount rate on bank
borrowings and changes in reserve requirements against bank deposits. These means are used in varying combinations to
influence overall growth and distribution of bank loans, investments and deposits, and their use may affect interest rates
charged on loans or paid on deposits.
Federal Securities Regulation. The Company’s common stock is registered with the SEC under the Exchange
Act. Consequently, the Company is subject to the information, proxy solicitation, insider trading and other restrictions
and requirements of the SEC under the Exchange Act.
Corporate Governance. The Dodd-Frank Act addressed many investor protection, corporate governance and
executive compensation matters that will affect most U.S. publicly traded companies. The Dodd-Frank Act increased
shareholder influence over boards of directors by requiring companies to give shareholders a nonbinding vote on
executive compensation and so-called “golden parachute” payments, and authorizing the SEC to promulgate rules that
would allow shareholders to nominate and solicit voters for their own candidates using a company’s proxy materials.
The legislation also directed the Federal Reserve to promulgate rules prohibiting excessive compensation paid to
executives of bank holding companies, regardless of whether such companies are publicly traded.
Supervision and Regulation of the Bank
General. The Bank is a Minnesota-chartered bank. The deposit accounts of the Bank are insured by the FDIC’s
Deposit Insurance Fund, or DIF, to the maximum extent provided under federal law and FDIC regulations, currently
$250,000 per insured depositor category. As a Minnesota-chartered FDIC-insured bank, the Bank is subject to the
examination, supervision, reporting and enforcement requirements of the MFID, the chartering authority for Minnesota
banks, and the FDIC, designated by federal law as the primary federal regulator of insured state banks that, like the
Bank, are not members of the Federal Reserve.
Deposit Insurance. As an FDIC-insured institution, the Bank is required to pay deposit insurance premium
assessments to the FDIC. The FDIC has adopted a risk-based assessment system whereby FDIC-insured institutions pay
insurance premiums at rates based on their risk classification. For institutions like the Bank that are not considered large
and highly complex banking organizations, assessments are now based on examination ratings and financial ratios. The
total base assessment rates currently range from 1.5 basis points to 30 basis points. At least semi-annually, the FDIC
updates its loss and income projections for the DIF and, if needed, increases or decreases the assessment rates, following
notice and comment on proposed rulemaking. The assessment base against which an FDIC-insured institution’s deposit
insurance premiums paid to the DIF has been calculated since effectiveness of the Dodd-Frank Act based on its average
consolidated total assets less its average tangible equity. This method shifted the burden of deposit insurance premiums
toward those large depository institutions that rely on funding sources other than U.S. deposits.
The reserve ratio is the FDIC insurance fund balance divided by estimated insured deposits. The Dodd-Frank
Act altered the minimum reserve ratio of the DIF, increasing the minimum from 1.15% to 1.35% of the estimated
amount of total insured deposits, and eliminating the requirement that the FDIC pay dividends to FDIC-insured
institutions when the reserve ratio exceeds certain thresholds. The reserve ratio reached 1.36% as of September 30, 2018
(most recent available), exceeding the statutory required minimum reserve ratio of 1.35%. The FDIC will provide
assessment credits to insured depository institutions, like the Bank, with total consolidated assets of less than $10 billion
for the portion of their regular assessments that contribute to growth in the reserve ratio between 1.15% and 1.35%. The
FDIC will apply the credits each quarter that the reserve ratio is at least 1.38% to offset the regular deposit insurance
assessments of institutions with credits.
FICO Assessments. In addition to paying basic deposit insurance assessments, FDIC-insured institutions must
pay Financing Corporation, or FICO, assessments. FICO is a mixed-ownership governmental corporation chartered by
the former Federal Home Loan Bank Board pursuant to the Competitive Equality Banking Act of 1987 to function as a
financing vehicle for the recapitalization of the former Federal Savings and Loan Insurance Corporation. FICO issued
30-year noncallable bonds of approximately $8.1 billion that mature through 2019. FICO’s authority to issue bonds
ended on December 12, 1991. Since 1996, federal legislation has required that all FDIC-insured institutions pay
assessments to cover interest payments on FICO’s outstanding obligations. The FICO assessment rate is adjusted
quarterly and for the fourth quarter of 2018 was 32 cents per $100 dollars of assessable deposits.
Supervisory Assessments. All Minnesota-chartered banks are required to pay supervisory assessments to the
MFID to fund the operations of that agency. The amount of the assessment is calculated on the basis of the Bank’s total
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assets. During the year ended December 31, 2018, the Bank paid supervisory assessments to the MFID totaling
approximately $83,498.
Capital Requirements. Banks are generally required to maintain capital levels in excess of other businesses. For
a discussion of capital requirements, see “—The Role of Capital” above.
Liquidity Requirements. Liquidity is a measure of the ability and ease with which bank assets may be
converted to cash. Liquid assets are those that can be converted to cash quickly if needed to meet financial obligations.
To remain viable, FDIC-insured institutions must have enough liquid assets to meet their near-term obligations, such as
withdrawals by depositors. Because the global financial crisis was in part a liquidity crisis, Basel III also includes a
liquidity framework that requires FDIC-insured institutions to measure their liquidity against specific liquidity tests. One
test, referred to as the liquidity coverage ratio, or LCR, is designed to ensure that the banking entity has an adequate
stock of unencumbered high-quality liquid assets that can be converted easily and immediately in private markets into
cash to meet liquidity needs for a 30-calendar day liquidity stress scenario. The other test, known as the net stable
funding ratios, or NSFR, is designed to promote more medium- and long-term funding of the assets and activities of
FDIC-insured institutions over a one-year horizon. These tests provide an incentive for banks and holding companies to
increase their holdings in Treasury securities and other sovereign debt as a component of assets, increase the use of long-
term debt as a funding source and rely on stable funding like core deposits (in lieu of brokered deposits).
In addition to liquidity guidelines already in place, the federal bank regulatory agencies implemented the Basel
III LCR in September 2014, which requires large financial firms to hold levels of liquid assets sufficient to protect
against constraints on their funding during times of financial turmoil, and in 2016 proposed implementation of the
NSFR. While these rules do not, and will not, apply to the Bank, it continues to review its liquidity risk management
policies in light of these developments.
Dividend Payments. The primary source of funds for the Company is dividends from the Bank. Under
Minnesota law, the Bank cannot declare or pay a cash dividend or dividend in-kind unless it will have a surplus
amounting to not less than 20% of its capital after payment of the dividend. Once this surplus amount reaches 50% of the
Bank’s capital, the Bank may pay dividends out of net profits if the dividends will not reduce the Bank’s capital,
undivided profits and reserves below requirements established by the MFID. Further, the Bank may not declare or pay a
dividend until cumulative dividends on preferred stock, if any, are paid in full.
The payment of dividends by any FDIC-insured institution is affected by the requirement to maintain adequate
capital pursuant to applicable capital adequacy guidelines and regulations, and a FDIC-insured institution generally is
prohibited from paying any dividends if, following payment thereof, the institution would be undercapitalized. As
described above, the Bank exceeded its capital requirements under applicable guidelines as of December 31, 2018.
Notwithstanding the availability of funds for dividends, however, the FDIC and the MFID may prohibit the payment of
dividends by the Bank if either or both determine such payment would constitute an unsafe or unsound practice. In
addition, under the Basel III Rule, institutions that seek the freedom to pay dividends will have to maintain 2.5% in
Common Equity Tier 1 Capital attributable to the capital conservation buffer. See “—The Role of Capital” above.
State Bank Investments and Activities. The Bank is permitted to make investments and engage in activities
directly or through subsidiaries as authorized by Minnesota law. However, under federal law and FDIC regulations,
FDIC-insured state banks are prohibited, subject to certain exceptions, from making or retaining equity investments of a
type, or in an amount, that are not permissible for a national bank. Federal law and FDIC regulations also prohibit FDIC-
insured state banks and their subsidiaries, subject to certain exceptions, from engaging as principal in any activity that is
not permitted for a national bank unless the bank meets, and continues to meet, its minimum regulatory capital
requirements and the FDIC determines that the activity would not pose a significant risk to the DIF. These restrictions
have not had, and are not currently expected to have, a material impact on the operations of the Bank.
Insider Transactions. The Bank is subject to certain restrictions imposed by federal law on “covered
transactions” between the Bank and its “affiliates.” The Company is an affiliate of the Bank for purposes of these
restrictions, and covered transactions subject to the restrictions include extensions of credit to the Company, investments
in the stock or other securities of the Company and the acceptance of the stock or other securities of the Company as
collateral for loans made by the Bank. The Dodd-Frank Act enhanced the requirements for certain transactions with
affiliates, including an expansion of the definition of “covered transactions” and an increase in the amount of time for
which collateral requirements regarding covered transactions must be maintained.
15
Certain limitations and reporting requirements are also placed on extensions of credit by the Bank to its
directors and officers, to directors and officers of the Company and its subsidiaries, to principal shareholders of the
Company and to “related interests” of such directors, officers and principal shareholders. In addition, federal law and
regulations may affect the terms upon which any person who is a director or officer of the Company or the Bank, or a
principal shareholder of the Company, may obtain credit from banks with which the Bank maintains a correspondent
relationship.
Safety and Soundness Standards/Risk Management. The bank regulatory agencies have adopted operational
and managerial standards to promote the safety and soundness of FDIC-insured institutions. The standards apply to
internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate
exposure, asset growth, compensation, fees and benefits, asset quality and earnings.
In general, the safety and soundness standards prescribe the goals to be achieved in each area, and each
institution is responsible for establishing its own procedures to achieve those goals. While regulatory standards do not
have the force of law, if an institution operates in an unsafe and unsound manner, the FDIC-insured institution’s primary
federal regulator may require the institution to submit a plan for achieving and maintaining compliance. If an FDIC-
insured institution fails to submit an acceptable compliance plan, or fails in any material respect to implement a
compliance plan that has been accepted by its primary federal regulator, the regulator is required to issue an order
directing the institution to cure the deficiency. Until the deficiency cited in the regulator’s order is cured, the regulator
may restrict the FDIC-insured institution’s rate of growth, require the FDIC-insured institution to increase its capital,
restrict the rates the institution pays on deposits or require the institution to take any action the regulator deems
appropriate under the circumstances. Noncompliance with safety and soundness may also constitute grounds for other
enforcement action by the federal bank regulatory agencies, including cease and desist orders and civil money penalty
assessments.
During the past decade, the bank regulatory agencies have increasingly emphasized the importance of sound
risk management processes and strong internal controls when evaluating the activities of the FDIC-insured institutions
they supervise. Properly managing risks has been identified as critical to the conduct of safe and sound banking activities
and has become even more important as new technologies, product innovation, and the size and speed of financial
transactions have changed the nature of banking markets. The agencies have identified a spectrum of risks facing a
banking institution including, but not limited to, credit, market, liquidity, operational, legal, and reputational risk. In
particular, recent regulatory pronouncements have focused on operational risk, which arises from the potential that
inadequate information systems, operational problems, breaches in internal controls, fraud, or unforeseen catastrophes
will result in unexpected losses. New products and services, third-party risk, incentive compensation and cybersecurity
are critical sources of risk that FDIC-insured institutions are expected to address in the current environment. The Bank is
expected to have active board and senior management oversight; adequate policies, procedures, and limits; adequate risk
measurement, monitoring, and management information systems; and comprehensive internal controls.
Branching Authority. Minnesota banks, such as the Bank, have the authority under Minnesota law to establish
branches anywhere in the State of Minnesota, subject to receipt of all required regulatory approvals. The Dodd-Frank
Act permits well-capitalized and well-managed banks to establish new interstate branches or acquire individual branches
of a bank in another state (rather than the acquisition of an out-of-state bank in its entirety) without impediments. Federal
law permits state and national banks to merge with banks in other states subject to: (i) regulatory approval; (ii) federal
and state deposit concentration limits; and (iii) state law limitations requiring the merging bank to have been in existence
for a minimum period of time (not to exceed five years) prior to the merger.
Transaction Account Reserves. Federal Reserve regulations require FDIC-insured institutions to maintain
reserves against their transaction accounts (primarily NOW and regular checking accounts). For 2019, the first $16.3
million of otherwise reservable balances are exempt from reserves and have a zero percent reserve requirement; for
transaction accounts aggregating between $16.3 million to $124.2 million, the reserve requirement is 3% of those
transaction account balances; and for net transaction accounts in excess of $124.2 million, the reserve requirement is
10% of the aggregate amount of total transaction account balances in excess of $124.2 million. These reserve
requirements are subject to annual adjustment by the Federal Reserve.
Community Reinvestment Act Requirements. The CRA requires the Bank to have a continuing and affirmative
obligation in a safe and sound manner to help meet the credit needs of the entire community, including low- and
moderate-income neighborhoods. Federal regulators regularly assess the Bank’s record of meeting the credit needs of its
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communities. Applications for additional acquisitions would be affected by the evaluation of the Bank’s effectiveness in
meeting its CRA requirements.
Anti-Money Laundering. The Uniting and Strengthening America by Providing Appropriate Tools Required to
Intercept and Obstruct Terrorism Act of 2001, or the USA Patriot Act, is designed to deny terrorists and criminals the
ability to obtain access to the U.S. financial system and has significant implications for FDIC-insured institutions,
brokers, dealers and other businesses involved in the transfer of money. The USA Patriot Act mandates financial
services companies to have policies and procedures with respect to measures designed to address any or all of the
following matters: (i) customer identification programs; (ii) money laundering; (iii) terrorist financing; (iv) identifying
and reporting suspicious activities and currency transactions; (v) currency crimes; and (vi) cooperation between FDIC-
insured institutions and law enforcement authorities.
Privacy and Cybersecurity. The Bank is subject to many U.S. federal and state laws and regulations governing
requirements for maintaining policies and procedures to protect non-public confidential information of its customers.
These laws require the Bank to periodically disclose their privacy policies and practices relating to sharing such
information and permit consumers to opt out of their ability to share information with unaffiliated third parties under
certain circumstances. They also impact the Bank’s ability to share certain information with affiliates and non-affiliates
for marketing and/or non-marketing purposes, or to contact customers with marketing offers. In addition, the Bank is
required to implement a comprehensive information security program that includes administrative, technical, and
physical safeguards to ensure the security and confidentiality of customer records and information. These security and
privacy policies and procedures, for the protection of personal and confidential information, are in effect across all
businesses and geographic locations.
Concentrations in Commercial Real Estate. Concentration risk exists when FDIC-insured institutions deploy
too many assets to any one industry or segment. A concentration in commercial real estate, or CRE, is one example of
regulatory concern. The interagency Concentrations in Commercial Real Estate Lending, Sound Risk Management
Practices guidance, or CRE Guidance, provides supervisory criteria, including the following numerical indicators, to
assist bank examiners in identifying banks with potentially significant commercial real estate loan concentrations that
may warrant greater supervisory scrutiny: (i) commercial real estate loans exceeding 300% of capital and increasing
50% or more in the preceding three years; or (ii) construction and land development loans exceeding 100% of capital.
The CRE Guidance does not limit banks’ levels of commercial real estate lending activities, but rather guides institutions
in developing risk management practices and levels of capital that are commensurate with the level and nature of their
commercial real estate concentrations. On December 18, 2015, the bank regulatory agencies issued a statement to
reinforce prudent risk-management practices related to CRE lending, having observed substantial growth in many CRE
asset and lending markets, increased competitive pressures, rising CRE concentrations in banks, and an easing of CRE
underwriting standards. The federal bank agencies reminded FDIC-insured institutions to maintain underwriting
discipline and exercise prudent risk-management practices to identify, measure, monitor, and manage the risks arising
from CRE lending. In addition, FDIC-insured institutions must maintain capital commensurate with the level and nature
of their CRE concentration risk.
As of December 31, 2018, the Bank’s total loans secured by multifamily and nonfarm residential properties
plus total construction and land development loans represented 480.2% of its total risk-based capital. Thus, the Bank is
deemed to have a concentration in commercial real estate lending. Accordingly, pursuant to the Policy Guidance, the
Bank is required to have heightened risk management practices in place to account for the heightened degree of risk
associated with commercial real estate lending.
Consumer Financial Services. The historical structure of federal consumer protection regulation applicable to
all providers of consumer financial products and services changed significantly on July 21, 2011, when the CFPB
commenced operations to supervise and enforce consumer protection laws. The CFPB has broad rulemaking authority
for a wide range of consumer protection laws that apply to all providers of consumer products and services, including the
Bank, as well as the authority to prohibit “unfair, deceptive or abusive” acts and practices. The CFPB has examination
and enforcement authority over providers with more than $10 billion in assets. FDIC-insured institutions with $10 billion
or less in assets, like the Bank, continue to be examined by their applicable bank regulators.
Because abuses in connection with residential mortgages were a significant factor contributing to the financial
crisis, many new rules issued by the CFPB and required by the Dodd-Frank Act addressed mortgage and mortgage-
related products, their underwriting, origination, servicing and sales. The Dodd-Frank Act significantly expanded
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underwriting requirements applicable to loans secured by 1-4 family residential real property and augmented federal law
combating predatory lending practices. In addition to numerous disclosure requirements, the Dodd-Frank Act imposed
new standards for mortgage loan originations on all lenders, including banks and savings associations, in an effort to
strongly encourage lenders to verify a borrower’s ability to repay, while also establishing a presumption of compliance
for certain “qualified mortgages.” The Regulatory Relief Act provided relief in connection with mortgages for banks
with assets of less than $10 billion, and, as a result, mortgages the Bank makes are now considered to be qualified
mortgages if they are held in portfolio for the life of the loan.
The CFPB’s rules have not had a significant impact on the Bank’s operations, except for higher compliance
costs.
Employees
As of December 31, 2018, the Company had 140 full-time equivalent employees. None of the Company’s
employees is a party to a collective bargaining agreement. The Company considers the relationship with its employees to
be good and has not experienced interruptions of operations due to labor disagreements.
Corporate Information
The Company’s principal executive office is located at 3800 American Boulevard West, Suite 100,
Bloomington, Minnesota 55431, and the telephone number at that address is (952) 893-6868. The website address is
www.investors.bridgewaterbankmn.com. The information contained on the website is not a part of, nor incorporated by
reference into, this report.
All filings made by the Company with the SEC may be copies or read at the SEC’s Public Reference Room at
100 F Street NE, Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained
by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site that contains reports, proxy and
information statements, and other information regarding issuers that file electronically with the SEC, as the Company
does. The website is www.sec.gov.
Item 1.A. RISK FACTORS
Investing in the Company’s common stock involves various risks, many of which are specific to the Company’s
business. Before making an investment decision, you should carefully read and consider the risk factors described below
as well as the other information included in this report and other documents we file with the SEC. The discussion below
addresses the material risks and uncertainties, of which the Company is currently aware, that could have a material
adverse effect on the Company’s business, results of operations, financial condition, and growth prospects. Other risks
that the Company does not know about now, or that the Company does not currently believe are significant, could
negatively impact the Company’s business or the trading price of the Company’s securities.
Credit Risks
Risks Related to Our Business
Our loan portfolio has a large concentration of commercial real estate loans, which involve risks specific to real
estate values and the health of the real estate market generally.
As of December 31, 2018, we had $1.11 billion of commercial real estate loans, consisting of $490.6 million of
loans secured by nonfarm nonresidential properties, $407.9 million of loans secured by multifamily residential properties
and $210.0 million of construction and land development loans. Commercial real estate loans represented 66.6% of our
total gross loan portfolio and 480.2% of the Bank’s total risk-based capital at December 31, 2018. The market value of
real estate securing our commercial real estate loans can fluctuate significantly in a short period of time as a result of
market conditions. Adverse developments affecting real estate values in our market area could increase the credit risk
associated with our loan portfolio. Additionally, the repayment of commercial real estate loans generally is dependent, in
large part, on sufficient income from the properties securing the loans to cover operating expenses and debt service.
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Economic events or governmental regulations outside of the control of the borrower or lender could negatively impact
the future cash flow and market values of the affected properties. If the loans that are collateralized by real estate become
troubled during a time when market conditions are declining or have declined, then we may not be able to realize the full
value of the collateral that we anticipated at the time of originating the loan, which could force us to take charge-offs or
require us to increase our provision for loan losses, which could have a material adverse effect on our business, financial
condition, results of operations and growth prospects.
Because a significant portion of our loan portfolio is comprised of real estate loans, negative changes in the economy
affecting real estate values and liquidity, as well as environmental factors, could impair the value of collateral
securing our real estate loans and result in loan and other losses.
At December 31, 2018, approximately 84.1% of our total gross loan portfolio was comprised of loans with real
estate as a primary component of collateral. As a result, adverse developments affecting real estate values in our market
area could increase the credit risk associated with our real estate loan portfolio. The market value of real estate can
fluctuate significantly in a short period of time as a result of market conditions in the area in which the real estate is
located. Adverse changes affecting real estate values and the liquidity of real estate in one or more of our markets could
increase the credit risk associated with our loan portfolio, significantly impair the value of property pledged as collateral
on loans and affect our ability to sell the collateral upon foreclosure without a loss or additional losses, which could
result in losses that would adversely affect our profitability. Such declines and losses would have a material adverse
effect on our business, financial condition, results of operations and growth prospects.
In addition, if hazardous or toxic substances are found on properties pledged as collateral, the value of the real
estate could be impaired. If we foreclose on and take title to such properties, we may be liable for remediation costs, as
well as for personal injury and property damage. Environmental laws may require us to incur substantial expenses to
address unknown liabilities and may materially reduce the affected property’s value or limit our ability to use or sell the
affected property. In addition, future laws or more stringent interpretations or enforcement policies with respect to
existing laws may increase our exposure to environmental liability. The remediation costs and any other financial
liabilities associated with an environmental hazard could have a material adverse effect on our business, financial
condition, results of operations and growth prospects.
A decline in the business and economic conditions in our market could have a material adverse effect on our
business, financial position, results of operations and growth prospects.
Unlike larger banks that are more geographically diversified, we conduct our operations almost exclusively in
the Twin Cities MSA. Because of the geographic concentration of our operations in the Twin Cities MSA, if the local
economy weakens, our growth and profitability could be constrained. Weak economic conditions are characterized by,
among other indicators, deflation, elevated levels of unemployment, fluctuations in debt and equity capital markets and
lower home sales and commercial activity. These factors could negatively affect the volume of loan originations,
increase the level of nonperforming assets, increase the rate of foreclosures and reduce the value of the properties
securing our loans. Any regional or local economic downturn that affects the Twin Cities MSA may affect us and our
profitability more significantly and more adversely than those of our competitors whose operations are less
geographically focused.
Our business depends on our ability to manage credit risk.
As a bank, our business requires us to manage credit risk. As a lender, we are exposed to the risk that our
borrowers will be unable to repay their loans according to their terms, and that the collateral securing repayment of their
loans, if any, may not be sufficient to ensure repayment. In addition, there are risks inherent in making any loan,
including risks with respect to the period of time over which the loan may be repaid, risks relating to proper loan
underwriting, risks resulting from changes in economic and industry conditions and risks inherent in dealing with
individual borrowers, including the risk that a borrower may not provide information to us about its business in a timely
manner, or may present inaccurate or incomplete information to us, as well as risks relating to the value of collateral. To
manage our credit risk, we must, among other actions, maintain disciplined and prudent underwriting standards and
ensure that our bankers follow those standards. The weakening of these standards for any reason, such as an attempt to
19
attract higher yielding loans, a lack of discipline or diligence by our employees in underwriting and monitoring loans or
our inability to adequately adapt policies and procedures to changes in economic or any other conditions affecting
borrowers and the quality of our loan portfolio, may result in loan defaults, foreclosures and charge-offs and may
necessitate that we significantly increase our allowance for loan losses, each of which could adversely affect our net
income. As a result, our inability to successfully manage credit risk could have a material adverse effect on our business,
financial condition, results of operations and growth prospects.
Our allowance for loan losses may prove to be insufficient to absorb potential losses in our loan portfolio.
We establish and maintain our allowance for loan losses at a level that management considers adequate to
absorb probable loan losses based on an analysis of our loan portfolio and current market environment. The allowance
for loan losses represents our estimate of probable losses in the portfolio at each balance sheet date and is based upon
relevant information available to us at such time. The allowance contains provisions for probable losses that have been
identified relating to specific borrowing relationships, as well as probable losses inherent in the loan portfolio that are
not specifically identified. Additions to the allowance for loan losses, which are charged to earnings through the
provision for loan losses, are determined based on a variety of factors, including an analysis of the loan portfolio,
historical loss experience and an evaluation of current economic conditions in our market area. The actual amount of
loan losses is affected by, among other things, changes in economic, operating and other conditions within our markets,
which may be beyond our control, and such losses may exceed current estimates.
As of December 31, 2018, our allowance for loan losses as a percentage of total gross loans was 1.20% and as a
percentage of total nonperforming loans was 3,447.7%. Although management believes that the allowance for loan
losses was adequate on such date to absorb probable losses on existing loans that may become uncollectible, losses in
excess of the existing allowance will reduce our net income and could have a material adverse effect on our business,
financial condition, results of operations and growth prospects. We may also be required to take additional provisions for
loan losses in the future to further supplement the allowance for loan losses, either due to management’s assessment that
the allowance is inadequate or as required by our banking regulators. Our banking regulators periodically review our
allowance for loan losses and the value attributed to nonaccrual loans or to real estate acquired through foreclosure and
may require us to adjust our determination of the value for these items. These adjustments may have a material adverse
effect on our business, financial condition, results of operations and growth prospects.
In addition, in June 2016, the Financial Accounting Standards Board, or FASB, issued a new accounting
standard that will replace the current approach under accounting principles generally accepted in the United States, or
GAAP, for establishing the allowance for loan losses, which generally considers only past events and current conditions,
with a forward-looking methodology that reflects the expected credit losses over the lives of financial assets, starting
when such assets are first originated or acquired. Under the revised methodology, credit losses will be measured based
on past events, current conditions and reasonable and supportable forecasts of future conditions that affect the
collectability of financial assets. The new standard is expected to generally result in increases to allowance levels and
will require the application of the revised methodology to existing financial assets through a one-time adjustment to
retained earnings upon initial effectiveness. As an emerging growth company, this standard will be effective for us for
fiscal years and interim periods beginning after December 15, 2021.
Many of our loans are to commercial borrowers, which have a higher degree of risk than other types of loans.
Commercial and industrial loans represented 15.7% of our total gross loan portfolio at December 31, 2018.
Because payments on such loans are often dependent on the successful operation of the business involved, repayment of
such loans is often more sensitive than other types of loans to the general business climate and economy. Accordingly, a
challenging business and economic environment may increase our risk related to commercial loans. Unlike residential
mortgage loans, which generally are made on the basis of the borrowers’ ability to make repayment from their
employment and other income and which are secured by real property whose value tends to be more easily ascertainable,
commercial loans typically are made on the basis of the borrowers’ ability to make repayment from the cash flow of the
commercial venture. Our commercial and industrial loans are primarily made based on the identified cash flow of the
borrower and secondarily on the collateral underlying the loans. Most often, this collateral consists of accounts
receivable, inventory and equipment. Inventory and equipment may depreciate over time, may be difficult to appraise
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and may fluctuate in value based on the success of the business. If the cash flow from business operations is reduced, the
borrower’s ability to repay the loan may be impaired. Due to the larger average size of each commercial loan as
compared with other loans such as residential loans, as well as collateral that is generally less readily-marketable, losses
incurred on a small number of commercial loans could have a material adverse effect on our business, financial
condition, results of operations and growth prospects.
Construction and land development loans are based upon estimates of costs and values associated with the complete
project. These estimates may be inaccurate, and we may be exposed to significant losses on loans for these projects.
Construction and land development loans comprised approximately 12.6% of our total loan portfolio as of
December 31, 2018. Such lending involves additional risks because funds are advanced upon the security of the project,
which is of uncertain value prior to its completion, and costs may exceed realizable values in declining real estate
markets. Because of the uncertainties inherent in estimating construction costs and the realizable market value of the
completed project and the effects of governmental regulation of real property, it is relatively difficult to evaluate
accurately the total funds required to complete a project and the related loan-to-value ratio. As a result, construction and
land development loans often involve the disbursement of substantial funds with repayment dependent, in part, on the
success of the ultimate project and the ability of the borrower to sell or lease the property, rather than the ability of the
borrower or guarantor to repay principal and interest. If our appraisal of the value of the completed project proves to be
overstated or market values or rental rates decline, we may have inadequate security for the repayment of the loan upon
completion of construction of the project. If we are forced to foreclose on a project prior to or at completion due to a
default, we may not be able to recover all of the unpaid balance of, and accrued interest on, the loan as well as related
foreclosure and holding costs. In addition, we may be required to fund additional amounts to complete the project and
may have to hold the property for an unspecified period of time while we attempt to dispose of it.
Our high concentration of large loans to certain borrowers may increase our credit risk.
Our growth over the last several years has been partially attributable to our ability to cultivate relationships with
certain individuals and businesses that have resulted in a concentration of large loans to a small number of borrowers. As
of December 31, 2018, our 10 largest borrowing relationships accounted for approximately 17.9% of our total gross loan
portfolio. We have established an informal, internal limit on loans to one borrower, principal or guarantor, but we may,
under certain circumstances, consider going above this internal limit in situations where management’s understanding of
the industry, the borrower’s business and the credit quality of the borrower are commensurate with the increased size of
the loan. Along with other risks inherent in these loans, such as the deterioration of the underlying businesses or property
securing these loans, this high concentration of borrowers presents a risk to our lending operations. If any one of these
borrowers becomes unable to repay its loan obligations as a result of business, economic or market conditions, or
personal circumstances, such as divorce or death, our nonaccruing loans and our provision for loan losses could increase
significantly, which could have a material adverse effect on our business, financial condition, results of operations and
growth prospects.
The small to midsized businesses that we lend to may have fewer resources to weather adverse business developments,
which may impair their ability to repay their loans.
We lend to small to midsized businesses, which generally have fewer financial resources in terms of capital or
borrowing capacity than larger entities, frequently have smaller market share than their competition, may be more
vulnerable to economic downturns, often need substantial additional capital to expand or compete and may experience
substantial volatility in operating results, any of which may impair their ability to repay their loans. In addition, the
success of a small and midsized business often depends on the management talents and efforts of one or two people or a
small group of people, and the death, disability or resignation of one or more of these people could have a material
adverse impact on the business and its ability to repay its loan. If general economic conditions negatively impact the
markets in which we operate and small to midsized businesses are adversely affected or our borrowers are otherwise
affected by adverse business developments, our business, financial condition, results of operations and growth prospects
may be materially adversely affected.
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Our lending limit may restrict our growth and prevent us from effectively implementing our growth strategy.
We are limited in the total amount we can loan to a single borrower or related borrowers by the amount of our
capital. The Bank is a Minnesota chartered bank and therefore all branches, regardless of location, fall under the legal
lending limits of the laws, rules and regulations applicable to banks chartered in the state of Minnesota. Minnesota’s
legal lending limit is a safety and soundness measure intended to prevent one person or a relatively small and
economically related group of persons from borrowing an unduly large amount of a bank’s funds. It is also intended to
safeguard a bank’s depositors by diversifying the risk of loan losses among a relatively large number of creditworthy
borrowers engaged in various types of businesses. Under Minnesota law, total loans and extensions of credit to a
borrower may not generally exceed 20% of the Bank’s capital stock and surplus, subject to certain exceptions. Based
upon our current capital levels, the amount we may lend to one borrower is significantly less than that of many of our
larger competitors, which may discourage potential borrowers who have credit needs in excess of our lending limit from
doing business with us. While we seek to accommodate larger loans by selling participations in those loans to other
financial institutions, this strategy may not always be available. If we are unable to compete for loans from our target
clients, we may not be able to effectively implement our business strategy, which could have a material adverse effect on
our business, financial condition, results of operations and growth prospects.
Greater seasoning of our loan portfolio could increase risk of credit defaults in the future.
As a result of our rapid growth, a significant portion of our loan portfolio at any given time is of relatively
recent origin. Typically, loans do not begin to show signs of credit deterioration or default until they have been
outstanding for some period of time (which varies by loan duration and loan type), a process referred to as “seasoning.”
As a result, a portfolio of more seasoned loans may more predictably follow a bank’s historical default or credit
deterioration patterns than a newer portfolio. Because 73.7% of our portfolio has been originated in the past three years,
the current level of delinquencies and defaults may not represent the level that may prevail as the portfolio becomes
more seasoned. If delinquencies and defaults increase, we may be required to increase our provision for loan losses,
which could have a material adverse effect on our business, financial condition, results of operations and growth
prospects.
Nonperforming assets take significant time to resolve and adversely affect our net interest income.
As of December 31, 2018, our nonperforming loans (which consist of nonaccrual loans and loans past due
90 days or more) totaled $581,000, or 0.03% of our total gross loan portfolio, and our nonperforming assets totaled
$581,000, or 0.03% of total assets. In addition, we had $311,000 in accruing loans that were 30-89 days delinquent as of
December 31, 2018.
Our nonperforming assets adversely affect our net interest income in various ways. We do not record interest
income on nonaccrual loans or foreclosed assets, thereby adversely affecting our net income and returns on assets and
equity. When we take collateral in foreclosure and similar proceedings, we are required to mark the collateral to its
then-fair market value, which may result in a loss. These nonperforming loans and foreclosed assets also increase our
risk profile and the level of capital our regulators believe is appropriate for us to maintain in light of such risks. The
resolution of nonperforming assets requires significant time commitments from management, which increases our loan
administration costs and adversely affects our efficiency ratio, and can be detrimental to the performance of their other
responsibilities. If we experience increases in nonperforming loans and nonperforming assets, our net interest income
may be negatively impacted and our loan administration costs could increase, each of which could have a material
adverse effect on our business, financial condition, results of operations and growth prospects.
Liquidity and Funding Risks
Liquidity risks could affect our operations and jeopardize our business, financial condition, results of operations and
growth prospects.
Liquidity is essential to our business. Liquidity risk is the risk that we will not be able to meet our obligations,
including financial commitments, as they come due and is inherent in our operations. An inability to raise funds through
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deposits, borrowings, the sale of loans or investment securities and from other sources could have a substantial negative
effect on our liquidity. Our most important source of funds consists of our client deposits, which can decrease for a
variety of reasons, including when clients perceive alternative investments, such as the stock market, as providing a
better risk/return tradeoff. If clients move money out of bank deposits and into other investments, we could lose a
relatively low cost source of funds, which would require us to seek other funding alternatives, including increasing our
dependence on wholesale funding sources, in order to continue to grow, thereby increasing our funding costs and
reducing our net interest income and net income.
Additionally, we access collateralized public funds, which are bank deposits of state and local municipalities.
These deposits are required to be secured by certain investment grade securities or other sources permitted by law to
ensure repayment. If we are unable to pledge sufficient collateral to secure public funding, we may lose access to this
source of liquidity that we have historically relied upon. In addition, the availability of and fluctuations in these funds
depends on the individual municipality’s fiscal policies and cash flow needs.
Other primary sources of funds consist of cash from operations, investment security maturities and sales and
proceeds from the issuance and sale of our equity and debt securities to investors. Additional liquidity is provided by
brokered deposits, repurchase agreements and the ability to borrow from the Federal Reserve and the Federal Home
Loan Bank of Des Moines, or FHLB. We may also borrow from third-party lenders from time to time. Our access to
funding sources in amounts adequate to finance or capitalize our activities or on terms that are acceptable to us could be
impaired by factors that affect us directly or the financial services industry or economy in general, such as disruptions in
the financial markets or negative views and expectations about the prospects for the financial services industry.
Economic conditions and a loss of confidence in financial institutions may increase our cost of funding and limit access
to certain customary sources of capital, including inter-bank borrowings, repurchase agreements and borrowings from
the discount window of the Federal Reserve. There is also the potential risk that collateral calls with respect to our
repurchase agreements could reduce our available liquidity.
Any decline in available funding could adversely impact our ability to continue to implement our strategic plan,
including originating loans and investing in securities, or to fulfill obligations such as paying our expenses, repaying our
borrowings or meeting deposit withdrawal demands, any of which could have a material adverse effect on our business,
financial condition, results of operations and growth prospects.
We depend on non-core funding sources, which causes our cost of funds to be higher when compared to other
financial institutions.
We use certain non-core, wholesale funding sources, including brokered deposits, federal funds purchased, and
FHLB advances. As of December 31, 2018, we had approximately $291.2 million of brokered deposits, which
represented approximately 18.7% of our total deposits, $18.0 million of federal funds purchased and $124.0 million of
FHLB advances. Unlike traditional deposits from our local clients, there is a higher likelihood that the funds wholesale
deposits provide will not remain with us after maturity. For example, depositors who have deposited funds with us
through brokers are a less stable source of funding than typical relationship deposit clients. Although we are increasing
our efforts to reduce our reliance on non-core funding sources, we may not be able to increase our market share of
core-deposit funding in our highly competitive market area. If we are unable to do so, we may be forced to increase the
amounts of wholesale funding sources. The cost of these funds can be volatile and may exceed the cost of core deposits
in our market area, which could have a material adverse effect on our net interest income. In addition, our maximum
borrowing capacity from the FHLB is based on the amount of mortgage and commercial loans we can pledge. As of
December 31, 2018, our advances from the FHLB were collateralized by $577.2 million of real estate and commercial
loans. If we are unable to pledge sufficient collateral to secure funding from the FHLB, we may lose access to this
source of liquidity that we have historically relied upon. If we are unable to access any of these types of funding sources
or if our costs related to them increases, our liquidity and ability to support demand for loans could be materially
adversely affected.
23
Our high concentration of large depositors may increase our liquidity risk, and the loss of any large depositor may
negatively impact our net interest margin.
We have developed relationships with certain individuals and businesses that have resulted in a concentration of
large deposits from a small number of clients. As of December 31, 2018, our 10 largest depositor relationships accounted
for approximately 18.1% of our total deposits, and our largest depositor relationship accounted for approximately 6.8%
of our total deposits. This high concentration of depositors presents a risk to our liquidity if one or more of them decides
to change its relationship with us and to withdraw all or a significant portion of their deposits. If such an event occurs,
we may need to seek out alternative sources of funding that may not be on the same terms as the deposits being replaced,
which could negatively impact our net interest margin if the alternative source of funding is at a higher rate and have a
material adverse effect on our business, financial condition, results of operations and growth prospects.
Our liquidity is dependent on dividends from the Bank.
The Company is a legal entity separate and distinct from the Bank. A substantial portion of our cash flow,
including cash flow to pay principal and interest on any debt we may incur, comes from dividends the Company receives
from the Bank. Various federal and state laws and regulations limit the amount of dividends that the Bank may pay to
the Company. For example, Minnesota law only permits banks to pay dividends if a bank has established a surplus fund
equal to or more than 20% of the bank’s capital stock and if the dividends will not reduce the bank’s capital, undivided
profits and reserves below specific requirements. As of December 31, 2018, the Bank had the capacity to pay the
Company a dividend of up to $8.5 million without the need to obtain prior regulatory approval. Also, the Company’s
right to participate in a distribution of assets upon a subsidiary’s liquidation or reorganization is subject to the prior
claims of the subsidiary’s creditors. In the event the Bank is unable to pay dividends to us, we may not be able to service
any debt we may incur, which could have a material adverse effect on our business, financial condition, results of
operations and growth prospects.
We may need to raise additional capital in the future, and if we fail to maintain sufficient capital, whether due to
losses, an inability to raise additional capital or otherwise, our business, financial condition, results of operations and
growth prospects, as well as our ability to maintain regulatory compliance, would be adversely affected.
We face significant capital and other regulatory requirements as a financial institution. We may need to raise
additional capital in the future to provide us with sufficient capital resources and liquidity to meet our commitments and
business needs, which could include the possibility of financing acquisitions. In addition, the Company, on a
consolidated basis, and the Bank, on a stand-alone basis, must meet certain regulatory capital requirements and maintain
sufficient liquidity. Importantly, regulatory capital requirements could increase from current levels, which could require
us to raise additional capital or contract our operations. Our ability to raise additional capital depends on conditions in
the capital markets, economic conditions and a number of other factors, including investor perceptions regarding the
banking industry, market conditions and governmental activities, and on our financial condition and performance.
Accordingly, we cannot assure you that we will be able to raise additional capital if needed or on terms acceptable to us.
If we fail to maintain capital to meet regulatory requirements, our business, financial condition, results of operations and
growth prospects would be materially and adversely affected.
We may be adversely affected by changes in the actual or perceived soundness or condition of other financial
institutions.
Financial services institutions that deal with each other are interconnected as a result of trading, investment,
liquidity management, clearing, counterparty and other relationships. Concerns about, or a default by, one institution
could lead to significant liquidity problems and losses or defaults by other institutions, as the commercial and financial
soundness of many financial institutions is closely related as a result of these credit, trading, clearing and other
relationships. Even the perceived lack of creditworthiness of, or questions about, a counterparty may lead to market-wide
liquidity problems and losses or defaults by various institutions. This systemic risk may adversely affect financial
intermediaries with which we interact on a daily basis or key funding providers such as the FHLB, any of which could
have a material adverse effect on our access to liquidity or otherwise have a material adverse effect on our business,
financial condition, results of operations and growth prospects.
24
Operational, Strategic and Reputational Risks
We may not be able to implement our growth strategy or manage costs effectively, resulting in lower earnings or
profitability.
Our strategy focuses on organic growth, supplemented by opportunistic acquisitions, but we may not be able to
continue to grow and increase our earnings in the future. Our growth requires that we increase our loans and deposits
while managing risks by following prudent loan underwriting standards without increasing interest rate risk or
compressing our net interest margin, hiring and retaining qualified employees and successfully implementing strategic
projects and initiatives. Even if we are able to increase our interest income, our earnings may nonetheless be reduced by
increased expenses, such as additional employee compensation or other general and administrative expenses and
increased interest expense on any liabilities incurred or deposits solicited to fund increases in assets.
In addition, we are in the process of constructing a new real estate development that we expect to be the
location of our new corporate headquarters. Due to the inherent difficulty in estimating costs associated with projects of
this scale and nature, the costs associated with this project, which are likely to be material, may be higher than we have
estimated. In addition, the process of moving our corporate headquarters is inherently complex and not part of our
day-to-day operations. As a result, that process could cause significant disruption to our operations and cause the
temporary diversion of management resources, all of which could have a material adverse effect on our business,
financial condition, results of operations and growth prospects.
Additionally, if our competitors extend credit on terms we find to pose excessive risks, or at interest rates which
we believe do not warrant the credit exposure, we may not be able to maintain our lending volume and could experience
deteriorating financial performance. Our inability to manage our growth successfully could have a material adverse
effect on our business, financial condition, results of operations and growth prospects.
We are highly dependent on our strategic leadership team, and the loss of any of our senior executive officers or
other key employees, or our inability to attract and retain qualified personnel, could harm our ability to implement
our strategic plan and impair our relationships with clients.
Our success is dependent, to a large degree, upon the continued service and skills of our strategic leadership
team, which consists of Jerry Baack, our Chairman of the Board, President and Chief Executive Officer, Jeff Shellberg,
our Executive Vice President and Chief Credit Officer, Mary Jayne Crocker, our Executive Vice President and Chief
Operating Officer, Joe Chybowski, our Senior Vice President and Chief Financial Officer, Nick Place, our Senior Vice
President and Chief Lending Officer, and Lisa Salazar, our Senior Vice President of Deposit Services and Emerging
Products. Our business and growth strategies are built primarily upon our ability to retain employees with experience
and business relationships within our market area. The loss of any of the members of our strategic leadership team or any
of our other key personnel could have an adverse impact on our business and growth because of their skills, years of
industry experience, knowledge of our market area, the difficulty of finding qualified replacement personnel and any
difficulties associated with transitioning of responsibilities to any new members of the strategic leadership team. As
such, we need to continue to attract and retain key personnel and to recruit qualified individuals who fit our culture to
succeed existing key personnel to ensure the continued growth and successful operation of our business. Leadership
changes may occur from time to time, and we cannot predict whether significant retirements or resignations will occur or
whether we will be able to recruit additional qualified personnel.
Competition for senior executives and skilled personnel in the financial services and banking industry is
intense, which means the cost of hiring, incentivizing and retaining skilled personnel may continue to increase. In
addition, our ability to effectively compete for senior executives and other qualified personnel by offering competitive
compensation and benefit arrangements may be restricted by applicable banking laws and regulations. The loss of the
services of any senior executive or other key personnel, the inability to recruit and retain qualified personnel in the future
or the failure to develop and implement a viable succession plan could have a material adverse effect on our business,
financial condition, results of operations and growth prospects.
25
Our ability to maintain our reputation is critical to the success of our business, and the failure to do so may
materially adversely affect our business and the value of our stock.
We rely, in part, on our reputation to attract clients and retain our client relationships. Damage to our reputation
could undermine the confidence of our current and potential clients in our ability to provide high-quality financial
services. Such damage could also impair the confidence of our counterparties and vendors and ultimately affect our
ability to effect transactions. Maintenance of our reputation depends not only on our success in maintaining our
service-focused culture and controlling and mitigating the various risks described in this report, but also on our success
in identifying and appropriately addressing issues that may arise in areas such as potential conflicts of interest,
anti-money laundering, client personal information and privacy issues, client and other third party fraud, record-keeping,
regulatory investigations and any litigation that may arise from the failure or perceived failure of us to comply with legal
and regulatory requirements. Maintaining our reputation also depends on our ability to successfully prevent third parties
from infringing on the “Bridgewater Bank” brand and associated trademarks and our other intellectual property. Defense
of our reputation, trademarks and other intellectual property, including through litigation, could result in costs that could
have a material adverse effect on our business, financial condition, results of operations and growth prospects.
The occurrence of fraudulent activity, breaches or failures of our information security controls or
cybersecurity-related incidents could have a material adverse effect on our business, financial condition, results of
operations and growth prospects.
As a bank, we are susceptible to fraudulent activity, information security breaches and cybersecurity-related
incidents that may be committed against us or our clients, which may result in financial losses or increased costs to us or
our clients, disclosure or misuse of our information or our client information, misappropriation of assets, privacy
breaches against our clients, litigation or damage to our reputation. Such fraudulent activity may take many forms,
including check fraud, electronic fraud, wire fraud, phishing, social engineering and other dishonest acts. Information
security breaches and cybersecurity-related incidents may include fraudulent or unauthorized access to systems used by
us or our clients, denial or degradation of service attacks and malware or other cyber-attacks.
In recent periods, there continues to be a rise in electronic fraudulent activity, security breaches and
cyber-attacks within the financial services industry, especially in the commercial banking sector due to cyber criminals
targeting commercial bank accounts. Moreover, in recent periods, several large corporations, including financial
institutions and retail companies, have suffered major data breaches, in some cases exposing not only confidential and
proprietary corporate information, but also sensitive financial and other personal information of their customers and
employees and subjecting them to potential fraudulent activity. Some of our clients may have been affected by these
breaches, which could increase their risks of identity theft and other fraudulent activity that could involve their accounts
with us.
Information pertaining to us and our clients is maintained, and transactions are executed, on networks and
systems maintained by us and certain third party partners, such as our online banking, mobile banking or accounting
systems. The secure maintenance and transmission of confidential information, as well as execution of transactions over
these systems, are essential to protect us and our clients against fraud and security breaches and to maintain the
confidence of our clients. Breaches of information security also may occur through intentional or unintentional acts by
those having access to our systems or the confidential information of our clients, including employees. In addition,
increases in criminal activity levels and sophistication, advances in computer capabilities, new discoveries,
vulnerabilities in third party technologies (including browsers and operating systems) or other developments could result
in a compromise or breach of the technology, processes and controls that we use to prevent fraudulent transactions and
to protect data about us, our clients and underlying transactions, as well as the technology used by our clients to access
our systems. Our third party partners’ inability to anticipate, or failure to adequately mitigate, breaches of security could
result in a number of negative events, including losses to us or our clients, loss of business or clients, damage to our
reputation, the incurrence of additional expenses, disruption to our business, additional regulatory scrutiny or penalties
or our exposure to civil litigation and possible financial liability, any of which could have a material adverse effect on
our business, financial condition, results of operations and growth prospects.
26
We depend on information technology and telecommunications systems of third parties, and any systems failures,
interruptions or data breaches involving these systems could adversely affect our operations and financial condition.
Our business is highly dependent on the successful and uninterrupted functioning of our information technology
and telecommunications systems, third party servicers, accounting systems, mobile and online banking platforms and
financial intermediaries. We outsource to third parties many of our major systems, such as data processing and mobile
and online banking. The failure of these systems, or the termination of a third party software license or service
agreement on which any of these systems is based, could interrupt our operations. Because our information technology
and telecommunications systems interface with and depend on third party systems, we could experience service denials
if demand for such services exceeds capacity or such third party systems fail or experience interruptions. A system
failure or service denial could result in a deterioration of our ability to process loans or gather deposits and provide
customer service, compromise our ability to operate effectively, result in potential noncompliance with applicable laws
or regulations, damage our reputation, result in a loss of customer business or subject us to additional regulatory scrutiny
and possible financial liability, any of which could have a material adverse effect on business, financial condition, results
of operations and growth prospects. In addition, failures of third parties to comply with applicable laws and regulations,
or fraud or misconduct on the part of employees of any of these third parties, could disrupt our operations or adversely
affect our reputation.
It may be difficult for us to replace some of our third party vendors, particularly vendors providing our core
banking and information services, in a timely manner if they are unwilling or unable to provide us with these services in
the future for any reason and even if we are able to replace them, it may be at higher cost or result in the loss of
customers. Any such events could have a material adverse effect on our business, financial condition, results of
operations and growth prospects.
Our operations rely heavily on the secure processing, storage and transmission of information and the
monitoring of a large number of transactions on a minute-by-minute basis, and even a short interruption in service could
have significant consequences. We also interact with and rely on retailers, for whom we process transactions, as well as
financial counterparties and regulators. Each of these third parties may be targets of the same types of fraudulent
activity, computer break-ins and other cybersecurity breaches described above, and the cybersecurity measures that they
maintain to mitigate the risk of such activity may be different than our own and may be inadequate.
As a result of financial entities and technology systems becoming more interdependent and complex, a cyber
incident, information breach or loss, or technology failure that compromises the systems or data of one or more financial
entities could have a material impact on counterparties or other market participants, including ourselves. As a result of
the foregoing, our ability to conduct business may be adversely affected by any significant disruptions to us or to third
parties with whom we interact.
Our use of third party vendors and our other ongoing third party business relationships is subject to increasing
regulatory requirements and attention.
Our use of third party vendors for certain information systems is subject to increasingly demanding regulatory
requirements and attention by our federal bank regulators. Recent regulations require us to enhance our due diligence,
ongoing monitoring and control over our third party vendors and other ongoing third party business relationships. In
certain cases we may be required to renegotiate our agreements with these vendors to meet these enhanced requirements,
which could increase our costs. We expect that our regulators will hold us responsible for deficiencies in our oversight
and control of our third party relationships and in the performance of the parties with which we have these relationships.
As a result, if our regulators conclude that we have not exercised adequate oversight and control over our third party
vendors or other ongoing third party business relationships or that such third parties have not performed appropriately,
we could be subject to enforcement actions, including civil money penalties or other administrative or judicial penalties
or fines, as well as requirements for customer remediation, any of which could have a material adverse effect on our
business, financial condition, results of operations and growth prospects.
27
We have a continuing need for technological change, and we may not have the resources to effectively implement
new technology or we may experience operational challenges when implementing new technology.
The financial services industry is undergoing rapid technological changes with frequent introductions of new
technology-driven products and services. In addition to better serving clients, the effective use of technology increases
efficiency and enables financial institutions to reduce costs. Our future success will depend in part upon our ability to
address the needs of our clients by using technology to provide products and services that will satisfy client demands for
convenience as well as to create additional efficiencies in our operations as we continue to grow. We may experience
operational challenges as we implement these new technology enhancements, which could result in us not fully realizing
the anticipated benefits from such new technology or require us to incur significant costs to remedy any such challenges
in a timely manner.
Many of our larger competitors have substantially greater resources to invest in technological improvements.
As a result, they may be able to offer additional or superior products to those that we will be able to offer, which would
put us at a competitive disadvantage. Accordingly, a risk exists that we will not be able to effectively implement new
technology-driven products and services or be successful in marketing such products and services to our clients.
In addition, the implementation of technological changes and upgrades to maintain current systems and
integrate new ones may also cause service interruptions, transaction processing errors and system conversion delays and
may cause us to fail to comply with applicable laws. We expect that new technologies and business processes applicable
to the banking industry will continue to emerge, and these new technologies and business processes may be better than
those we currently use. Because the pace of technological change is high and our industry is intensely competitive, we
may not be able to sustain our investment in new technology as critical systems and applications become obsolete or as
better ones become available. A failure to successfully keep pace with technological change affecting the financial
services industry and failure to avoid interruptions, errors and delays could have a material adverse effect on our
business, financial condition, results of operations and growth prospects.
We depend on the accuracy and completeness of information about clients and counterparties.
In deciding whether to extend credit or enter into other transactions, and in evaluating and monitoring our loan
and deposit portfolios on an ongoing basis, we may rely on information furnished by or on behalf of clients and
counterparties, including financial statements, credit reports and other financial information. We may also rely on
representations of those clients or counterparties or of other third parties, such as independent auditors, as to the
accuracy and completeness of that information. Reliance on inaccurate, incomplete, fraudulent or misleading financial
statements, credit reports or other financial or business information, or the failure to receive such information on a timely
basis, could result in loan losses, reputational damage or other effects that could have a material adverse effect on our
business, financial condition, results of operations and growth prospects.
If we pursue additional acquisitions, it may expose us to financial, execution and operational risks.
We plan to grow our business organically but remain open to considering potential bank or other acquisition
opportunities that fit within our overall strategy and that we believe make financial and strategic sense. Although we do
not have any current plans, arrangements or understandings to make any acquisitions, in the event that we pursue
additional acquisitions, we may have difficulty completing them and may not realize the anticipated benefits of any
transaction we complete. For example, we may not be successful in realizing anticipated cost savings, and we may not
be successful in preventing disruptions in service to existing client relationships of the acquired institution. Our potential
acquisition activities could require us to use a substantial amount of cash, other liquid assets or incur additional debt. In
addition, if goodwill recorded in connection with our potential future acquisitions were determined to be impaired, then
we would be required to recognize a charge against our earnings, which could materially and adversely affect our results
of operations during the period in which the impairment was recognized.
In addition to the foregoing, we may face additional risks in acquisitions to the extent we acquire new lines of
business or new products, or enter new geographic areas, in which we have little or no current experience, especially if
we lose key employees of the acquired operations. We cannot assure you that we will be successful in overcoming these
28
risks or any other problems encountered in connection with acquisitions. Our inability to overcome risks associated with
acquisitions could have a material adverse effect on our business, financial condition, results of operations and growth
prospects.
New lines of business, products, product enhancements or services may subject us to additional risks.
From time to time, we may implement new lines of business or offer new products and product enhancements
as well as new services within our existing lines of business. There are substantial risks and uncertainties associated with
these efforts, particularly in instances in which the markets are not fully developed. In implementing, developing or
marketing new lines of business, products, product enhancements or services, we may invest significant time and
resources, although we may not assign the appropriate level of resources or expertise necessary to make these new lines
of business, products, product enhancements or services successful or to realize their expected benefits. Further, initial
timetables for the introduction and development of new lines of business, products, product enhancements or services
may not be achieved, and price and profitability targets may not prove feasible. External factors, such as compliance
with regulations, competitive alternatives and shifting market preferences, may also affect the ultimate implementation
of a new line of business or offerings of new products, product enhancements or services. Furthermore, any new line of
business, product, product enhancement or service or system conversion could have a significant impact on the
effectiveness of our system of internal controls. Failure to successfully manage these risks in the development and
implementation of new lines of business or offerings of new products, product enhancements or services could have a
material adverse effect on our business, financial condition, results of operations and growth prospects.
We operate in a highly competitive and changing industry and market area and compete with both banks and
non-banks.
We operate in the highly competitive financial services industry and face significant competition for clients
from financial institutions located both within and beyond our market area. We compete with national commercial
banks, regional banks, private banks, savings banks, credit unions, non-bank financial services companies and other
financial institutions operating within or near the areas we serve, many of whom target the same clients we do in the
Twin Cities MSA. As client preferences and expectations continue to evolve, technology has lowered barriers to entry
and made it possible for banks to expand their geographic reach by providing services over the internet and for
non-banks to offer products and services traditionally provided by banks, such as automatic transfer and automatic
payment systems. The banking industry is experiencing rapid changes in technology, and, as a result, our future success
will depend in part on our ability to address our clients’ needs by using technology. Client loyalty can be influenced by a
competitor’s new products, especially offerings that could provide cost savings or a higher return to the client. Increased
lending activity of competing banks has also led to increased competitive pressures on loan rates and terms for
high-quality credits. We may not be able to compete successfully with other financial institutions in our markets,
particularly with larger financial institutions that have significantly greater resources than us, and we may have to pay
higher interest rates to attract deposits, accept lower yields to attract loans and pay higher wages for new employees,
resulting in lower net interest margins and reduced profitability. Many of our non-bank competitors are not subject to the
same extensive regulations that govern our activities and may have greater flexibility in competing for business. The
financial services industry could become even more competitive as a result of legislative, regulatory and technological
changes and continued consolidation. In addition, some of our current commercial banking clients may seek alternative
banking sources as they develop needs for credit larger than we may be able to accommodate or more expansive product
mixes offered by larger institutions.
Severe weather, natural disasters, pandemics, acts of war or terrorism or other adverse external events could
significantly impact our business.
Severe weather, natural disasters, widespread disease or pandemics, acts of war or terrorism or other adverse
external events could have a significant impact on our ability to conduct business. In addition, such events could affect
the stability of our deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral
securing loans, cause significant property damage, result in loss of revenue or cause us to incur additional expenses. The
occurrence of any of these events in the future could have a material adverse effect on our business, financial condition,
results of operations and growth prospects.
29
Legal, Accounting and Compliance Risks
We are subject to commercial real estate lending guidance issued by the federal banking regulators that impacts our
operations and capital requirements.
The federal banking regulators have issued guidance regarding concentrations in commercial real estate lending
directed at institutions that have particularly high concentrations of commercial real estate loans within their lending
portfolios. This guidance suggests that institutions whose commercial real estate loans exceed certain percentages of
capital should implement heightened risk management practices appropriate to their concentration risk and may be
required to maintain higher capital ratios than institutions with lower concentrations in commercial real estate lending.
As of December 31, 2018, our commercial real estate loans represented 480.2% of the Bank’s total risk-based capital. As
a result, we are deemed to have a concentration in commercial real estate lending under applicable regulatory guidelines.
Accordingly, pursuant to guidance issued by the federal bank regulatory agencies, we are required to have heightened
risk management practices in place to account for the heightened degree of risk associated with commercial real estate
lending and may be required to maintain capital in excess of regulatory minimums. We cannot guarantee that the risk
management practices we have implemented will be effective to prevent losses relating to our commercial real estate
portfolio. In addition, increased capital requirements could limit our ability to leverage our capital, which could have a
material adverse effect on our business, financial condition, results of operations and growth prospects.
Our risk management framework may not be effective in mitigating risks or losses to us.
Our risk management framework is comprised of various processes, systems and strategies, and is designed to
manage the types of risk to which we are subject, including, among others, operational, credit, market, liquidity, interest
rate and compliance. Our framework also includes financial or other modeling methodologies that involve management
assumptions and judgment. Our risk management framework may not be effective under all circumstances and it may
not adequately mitigate any risk or loss to us. If our framework is not effective, we could suffer unexpected losses and
our business, financial condition, results of operations and growth prospects could be materially and adversely affected.
We may also be subject to potentially adverse regulatory consequences.
Our accounting estimates and risk management processes and controls rely on analytical and forecasting techniques
and models and assumptions, which may not accurately predict future events.
Our accounting policies and methods are fundamental to the manner in which we record and report our
financial condition and results of operations. Our management must exercise judgment in selecting and applying many
of these accounting policies and methods so they comply with GAAP and reflect management’s judgment of the most
appropriate manner to report our financial condition and results of operations. In some cases, management must select
the accounting policy or method to apply from two or more alternatives, any of which may be reasonable under the
circumstances, yet which may result in our reporting materially different results than would have been reported under a
different alternative.
Certain accounting policies are critical to presenting our financial condition and results of operations. They
require management to make difficult, subjective or complex judgments about matters that are uncertain. Materially
different amounts could be reported under different conditions or using different assumptions or estimates. These critical
accounting policies include policies related to the allowance for loan losses, investment securities impairment and
deferred tax assets. See Note 1 of the Company’s Consolidated Financial Statements included as part of this Annual
Report on Form 10-K for further information. Because of the uncertainty of estimates involved in these matters, we may
be required to do one or more of the following: significantly increase the allowance for loan losses or sustain loan losses
that are significantly higher than the reserve provided, experience additional impairment in our securities portfolio or
record a valuation allowance against our deferred tax assets. Any of these could have a material adverse effect on our
business, financial condition, results of operations and growth prospects.
Our risk management processes, internal controls, disclosure controls and corporate governance policies and
procedures are based in part on certain assumptions and can provide only reasonable (not absolute) assurances that the
objectives of the system are met. Any failure or circumvention of our controls, processes and procedures or failure to
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comply with regulations related to controls, processes and procedures could necessitate changes in those controls,
processes and procedures, which may increase our compliance costs, divert management attention from our business or
subject us to regulatory actions and increased regulatory scrutiny. Any of these could have a material adverse effect on
our business, financial condition, results of operations and growth prospects.
Changes in accounting policies or standards could materially impact our financial statements.
From time to time, the FASB or the SEC, may change the financial accounting and reporting standards that
govern the preparation of our financial statements. Such changes may result in us being subject to new or changing
accounting and reporting standards. In addition, the bodies that interpret the accounting standards (such as banking
regulators or outside auditors) may change their interpretations or positions on how these standards should be applied.
These changes may be beyond our control, can be hard to predict and can materially impact how we record and report
our financial condition and results of operations. In some cases, we could be required to apply a new or revised standard
retroactively, or apply an existing standard differently, in each case resulting in our needing to revise or restate prior
period financial statements.
The obligations associated with being a public company require significant resources and management attention,
which may divert time and attention from our business operations.
As a public company, we are required to file periodic reports containing our consolidated financial statements
with the SEC within a specified time following the completion of quarterly and annual periods. As a public company, we
also incur significant legal, accounting, insurance, and other expenses. Compliance with these reporting requirements
and other rules of the SEC could increase our legal and financial compliance costs and make some activities more time
consuming and costly, which could negatively affect our efficiency ratio. Furthermore, the need to establish and
maintain the corporate infrastructure demanded of a public company may divert management’s attention from
implementing our strategic plan, which could prevent us from successfully implementing our growth initiatives and
improving our business, results of operations and financial condition.
As an emerging growth company as defined in the JOBS Act, we are taking advantage of certain temporary
exemptions from various reporting requirements, including reduced disclosure obligations regarding executive
compensation in our periodic reports and proxy statements and an exemption from the requirement to obtain an
attestation from our auditors on management’s assessment of our internal control over financial reporting. When these
exemptions cease to apply, we expect to incur additional expenses and devote increased management effort toward
ensuring compliance with them.
Litigation and regulatory actions, including possible enforcement actions, could subject us to significant fines,
penalties, judgments or other requirements resulting in increased expenses or restrictions on our business activities.
Our business is subject to increased litigation and regulatory risks as a result of a number of factors, including
the highly regulated nature of the financial services industry and the focus of state and federal prosecutors on banks and
the financial services industry generally. This focus has only intensified since the financial crisis, with regulators and
prosecutors focusing on a variety of financial institution practices and requirements, including foreclosure practices,
compliance with applicable consumer protection laws, classification of “held for sale” assets and compliance with
anti-money laundering statutes, the Bank Secrecy Act and sanctions administered by the Office of Foreign Assets
Control of the U.S. Treasury.
In the normal course of business, from time to time, we have in the past and may in the future be named as a
defendant in various legal actions, including arbitrations, class actions and other litigation, arising in connection with our
current or prior business activities. Legal actions could include claims for substantial compensatory or punitive damages
or claims for indeterminate amounts of damages. We may also, from time to time, be the subject of subpoenas, requests
for information, reviews, investigations and proceedings (both formal and informal) by governmental agencies regarding
our current or prior business activities. Any such legal or regulatory actions may subject us to substantial compensatory
or punitive damages, significant fines, penalties, obligations to change our business practices or other requirements
resulting in increased expenses, diminished income and damage to our reputation. Our involvement in any such matters,
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whether tangential or otherwise and even if the matters are ultimately determined in our favor, could also cause
significant harm to our reputation and divert management attention from the operation of our business. Further, any
settlement, consent order or adverse judgment in connection with any formal or informal proceeding or investigation by
government agencies may result in litigation, investigations or proceedings as other litigants and government agencies
begin independent reviews of the same activities. As a result, the outcome of legal and regulatory actions could have a
material adverse effect on our business, financial condition, results of operations and growth prospects.
If the goodwill that we recorded in connection with a recent acquisition becomes impaired, it could have a negative
impact on our financial condition and results of operations.
As of December 31, 2018, we had goodwill of $2.6 million, or 1.2% of our total shareholders’ equity. The
excess purchase consideration over the fair value of net assets from acquisitions, or goodwill, is evaluated for
impairment at least annually and on an interim basis if an event or circumstance indicates that it is more likely than not
that an impairment has occurred. In testing for impairment, we conduct a qualitative assessment, and we also estimate
the fair value of net assets based on analyses of our market value, discounted cash flows and peer values. Consequently,
the determination of the fair value of goodwill is sensitive to market-based economics and other key assumptions.
Variability in market conditions or in key assumptions could result in impairment of goodwill, which is recorded as a
non-cash adjustment to income. An impairment of goodwill could have a material adverse effect on our business,
financial condition, results of operations and growth prospects.
We are subject to extensive regulation, and the regulatory framework that applies to us, together with any future
legislative or regulatory changes, may significantly affect our operations.
The banking industry is extensively regulated and supervised under both federal and state laws and regulations
that are intended primarily for the protection of depositors, clients, federal deposit insurance funds and the banking
system as a whole, not for the protection of our shareholders. The Company is subject to regulation and supervision by
the Federal Reserve, and the Bank is subject to regulation and supervision by the FDIC and the Minnesota Department
of Commerce. The laws and regulations applicable to us govern a variety of matters, including permissible types,
amounts and terms of loans and investments we may make, the maximum interest rate that may be charged, the amount
of reserves we must hold against deposits we take, the types of deposits we may accept, maintenance of adequate capital
and liquidity, changes in the control of us and our bank, restrictions on dividends and establishment of new offices. We
must obtain approval from our regulators before engaging in certain activities, and there is the risk that such approvals
may not be obtained, either in a timely manner or at all. Our regulators also have the ability to compel us to take certain
actions, or restrict us from taking certain actions entirely, such as actions that our regulators deem to constitute an unsafe
or unsound banking practice. Our failure to comply with any applicable laws or regulations, or regulatory policies and
interpretations of such laws and regulations, could result in sanctions by regulatory agencies, civil money penalties or
damage to our reputation, all of which could have a material adverse effect on our business, financial condition, results
of operations and growth prospects.
Since the financial crisis, federal and state banking laws and regulations, as well as interpretations and
implementations of these laws and regulations, have undergone substantial review and change. In particular, the
Dodd-Frank Wall Street Reform and Consumer Protection Act, or Dodd-Frank Act, drastically revised the laws and
regulations under which we operate. As an institution with less than $10 billion in assets, certain elements of the
Dodd-Frank Act have not been applied to us and provisions of the Regulatory Relief Act are intended to result in
meaningful regulatory relief for community banks and their holding companies. While we endeavor to maintain safe
banking practices and controls beyond the regulatory requirements applicable to us, our internal controls may not match
those of larger banking institutions that are subject to increased regulatory oversight.
Financial institutions generally have also been subjected to increased scrutiny from regulatory authorities. This
increased regulatory burden has resulted and may continue to result in increased costs of doing business and may in the
future result in decreased revenues and net income, reduce our ability to compete effectively to attract and retain clients,
or make it less attractive for us to continue providing certain products and services. Any future changes in federal and
state laws and regulations, as well as the interpretation and implementation of such laws and regulations, could affect us
in substantial and unpredictable ways, including those listed above or other ways that could have a material adverse
32
effect on our business, financial condition, results of operations and growth prospects. Recent political developments,
including the change in administration in the United States, have increased additional uncertainty to the implementation,
scope and timing of regulatory reforms.
Changes in tax laws and regulations, or changes in the interpretation of existing tax laws and regulations, may have
a material adverse effect on our business, financial condition, results of operations and growth prospects.
We operate in an environment that imposes income taxes on our operations at both the federal and state levels
to varying degrees. We engage in certain strategies to minimize the impact of these taxes. Consequently, any change in
tax laws or regulations, or new interpretation of an existing law or regulation, could significantly alter the effectiveness
of these strategies.
The net deferred tax asset reported on our balance sheet generally represents the tax benefit of future deductions
from taxable income for items that have already been recognized for financial reporting purposes. The bulk of these
deferred tax assets consists of deferred loan loss deductions and deferred compensation deductions. The net deferred tax
asset is measured by applying currently-enacted income tax rates to the accounting period during which the tax benefit is
expected to be realized. As of December 31, 2018, our net deferred tax asset was $6.7 million.
On December 22, 2017, the Tax Cuts and Jobs Act was signed into law. The act includes numerous changes to
existing tax law, including a permanent reduction in the federal corporate income tax rate from 35% to 21%, which took
effect on January 1, 2018. The reduction in the federal corporate income tax rate resulted in an impairment of our net
deferred tax asset based on our revaluation of the future tax benefit of these deferrals using the lower tax rate. We
recorded this impairment as an additional tax provision of $2.0 million in the fourth quarter of 2017.
We also face risk based on actions of the U.S. Treasury and the Internal Revenue Service, or IRS. In November
2016, these agencies issued a notice making captive insurance company activities “transactions of interest” due to the
potential for tax avoidance or evasion. We have a captive insurance company, which is a wholly-owned subsidiary of the
Company that provides insurance coverage to the Company and its subsidiaries for risk management purposes or where
commercial insurance may not be available or economically feasible. It is not certain at this point how the notice may
impact us or the continued operation of the captive insurance company as a risk management tool, but if the activity is
deemed by the IRS to be an abusive tax structure, we may become subject to significant penalties and interest.
In addition, on February 13, 2018, we formed Bridgewater Investment Management, Inc., a Minnesota
corporation and a subsidiary of the Bank, to hold certain municipal securities and to engage in municipal lending
activities. Based on current tax regulations and guidance, we believe that municipal securities held by a non-bank
subsidiary of a financial institution are eligible to receive favorable federal income tax treatment. Like our captive
insurance company, there is a risk that the IRS may investigate these types of arrangements and issue new guidance
eliminating the tax benefit to such a structure.
There is uncertainty surrounding potential legal, regulatory and policy changes by new presidential administrations
in the United States that may directly affect financial institutions and the global economy.
Changes in federal policy and at regulatory agencies occur over time through policy and personnel changes
following elections, which lead to changes involving the level of oversight and focus on the financial services industry.
The nature, timing and economic and political effects of potential changes to the current legal and regulatory framework
affecting financial institutions remain highly uncertain. Uncertainty surrounding future changes may adversely affect our
operating environment and therefore our business, financial condition, results of operations and growth prospects.
We are subject to more stringent capital requirements.
Banking institutions are required to hold more capital as a percentage of assets than most industries. In the wake
of the global financial crisis, our capital requirements increased, both in the amount of capital we must hold and in the
quality of the capital to absorb losses. Holding high amounts of capital compresses our earnings and constrains growth.
In addition, the failure to meet applicable regulatory capital requirements could result in one or more of our regulators
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placing limitations or conditions on our activities, including our growth initiatives, or restricting the commencement of
new activities, and could affect client and investor confidence, our costs of funds and FDIC insurance costs and our
ability to make acquisitions and ultimately result in a material adverse effect on our business, financial condition, results
of operations and growth prospects.
Federal and state regulators periodically examine our business, and we may be required to remediate adverse
examination findings.
The Federal Reserve, the FDIC and the Minnesota Department of Commerce periodically examine us,
including our operations and our compliance with laws and regulations. If, as a result of an examination, a banking
agency were to determine that our financial condition, capital resources, asset quality, earnings prospects, management,
liquidity or other aspects of any of our operations had become unsatisfactory, or that we were in violation of any law or
regulation, they may take a number of different remedial actions as they deem appropriate. These actions include the
power to enjoin “unsafe or unsound” practices, to require affirmative action to correct any conditions resulting from any
violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in our capital,
to restrict our growth, to assess civil money penalties, to fine or remove officers and directors and, if it is concluded that
such conditions cannot be corrected or there is an imminent risk of loss to depositors, to terminate our deposit insurance
and place us into receivership or conservatorship. Any regulatory action against us could have a material adverse effect
on our business, financial condition, results of operations and growth prospects.
We are subject to numerous laws designed to protect consumers, including the Community Reinvestment Act and fair
lending laws, and failure to comply with these laws could lead to a wide variety of sanctions.
The Community Reinvestment Act of 1977, or CRA, requires the Bank, consistent with safe and sound
operations, to ascertain and meet the credit needs of its entire community, including low and moderate income areas. Our
failure to comply with the CRA could, among other things, result in the denial or delay of certain corporate applications
filed by us, including applications for branch openings or relocations and applications to acquire, merge or consolidate
with another banking institution or holding company. In addition, the CRA, the Equal Credit Opportunity Act, the Fair
Housing Act and other fair lending laws and regulations prohibit discriminatory lending practices by financial
institutions. The U.S. Department of Justice, bank regulatory agencies and other federal agencies are responsible for
enforcing these laws and regulations. A challenge to an institution’s compliance with fair lending laws and regulations
could result in a wide variety of sanctions, including damages and civil money penalties, injunctive relief, restrictions on
mergers and acquisitions activity, restrictions on expansion and restrictions on entering new business lines. Private
parties may also challenge an institution’s performance under fair lending laws in private class action litigation. Such
actions could have a material adverse effect on our business, financial condition, results of operations and growth
prospects.
Noncompliance with the Bank Secrecy Act and other anti-money laundering statutes and regulations could result in
fines or sanctions against us.
The Bank Secrecy Act, the USA Patriot Act and other laws and regulations require financial institutions, among
other duties, to institute and maintain an effective anti-money laundering program and to file reports such as suspicious
activity reports and currency transaction reports. We are required to comply with these and other anti-money laundering
requirements. The bank regulatory agencies and Financial Crimes Enforcement Network are authorized to impose
significant civil money penalties for violations of those requirements and have recently engaged in coordinated
enforcement efforts against banks and other financial services providers with the U.S. Department of Justice, Drug
Enforcement Administration and IRS. We are also subject to increased scrutiny of compliance with the rules enforced by
the Office of Foreign Assets Control. If our policies, procedures and systems are deemed deficient, we would be subject
to liability, including fines and regulatory actions, which may include restrictions on our ability to pay dividends and the
necessity to obtain regulatory approvals to proceed with certain aspects of our business plan, including our acquisition
plans.
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Failure to maintain and implement adequate programs to combat money laundering and terrorist financing
could also have serious reputational consequences for us. Any of these results could have a material adverse effect on
our business, financial condition, results of operations and growth prospects.
Regulations relating to privacy, information security and data protection could increase our costs, affect or limit how
we collect and use personal information and adversely affect our business opportunities.
We are subject to various privacy, information security and data protection laws, including requirements
concerning security breach notification, and we could be negatively affected by these laws. For example, our business is
subject to the Gramm-Leach-Bliley Act which, among other things (i) imposes certain limitations on our ability to share
nonpublic personal information about our clients with nonaffiliated third parties, (ii) requires that we provide certain
disclosures to clients about our information collection, sharing and security practices and afford clients the right to “opt
out” of any information sharing by us with nonaffiliated third parties (with certain exceptions) and (iii) requires that we
develop, implement and maintain a written comprehensive information security program containing appropriate
safeguards based on our size and complexity, the nature and scope of our activities and the sensitivity of client
information we process, as well as plans for responding to data security breaches. Various state and federal banking
regulators and states have also enacted data security breach notification requirements with varying levels of individual,
consumer, regulatory or law enforcement notification in certain circumstances in the event of a security breach.
Moreover, legislators and regulators in the United States are increasingly adopting or revising privacy, information
security and data protection laws that potentially could have a significant impact on our current and planned privacy,
data protection and information security-related practices, our collection, use, sharing, retention and safeguarding of
consumer or employee information and some of our current or planned business activities. This could also increase our
costs of compliance and business operations and could reduce income from certain business initiatives. This includes
increased privacy-related enforcement activity at the federal level, by the Federal Trade Commission and the Consumer
Financial Protection Bureau, as well as at the state level, such as with regard to mobile applications.
Compliance with current or future privacy, data protection and information security laws (including those
regarding security breach notification) affecting client or employee data to which we are subject could result in higher
compliance and technology costs and could restrict our ability to provide certain products and services, which could
have a material adverse effect on our business, financial condition, results of operations and growth prospects. Our
failure to comply with privacy, data protection and information security laws could result in potentially significant
regulatory or governmental investigations or actions, litigation, fines, sanctions and damage to our reputation, which
could have a material adverse effect on our business, financial condition, results of operations and growth prospects.
The Federal Reserve may require us to commit capital resources to support the Bank.
As a matter of policy, the Federal Reserve expects a bank holding company to act as a source of financial and
managerial strength to a subsidiary bank and to commit resources to support such subsidiary bank. The Dodd-Frank Act
codified the Federal Reserve’s policy on serving as a source of financial strength. Under the “source of strength”
doctrine, the Federal Reserve may require a bank holding company to make capital injections into a troubled subsidiary
bank and may charge the bank holding company with engaging in unsafe and unsound practices for failure to commit
resources to a subsidiary bank. A capital injection may be required at times when the holding company may not have the
resources to provide it and therefore may be required to borrow the funds or raise capital. Any loans by a holding
company to its subsidiary bank are subordinate in right of payment to deposits and to certain other indebtedness of such
subsidiary bank. In the event of a bank holding company’s bankruptcy, the bankruptcy trustee will assume any
commitment by the holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank.
Moreover, bankruptcy law provides that claims based on any such commitment will be entitled to a priority of payment
over the claims of the institution’s general unsecured creditors, including the holders of its note obligations. Thus, any
borrowing that must be done by the Company to make a required capital injection becomes more difficult and expensive
and could have a material adverse effect on our business, financial condition, results of operations and growth prospects.
35
We are an emerging growth company within the meaning of the Securities Act and because we have decided to take
advantage of certain exemptions from various reporting and other requirements applicable to emerging growth
companies, our common stock could be less attractive to investors.
For as long as we remain an emerging growth company, as defined in the JOBS Act, we will have the option to
take advantage of certain exemptions from various reporting and other requirements that are applicable to other public
companies that are not emerging growth companies, including not being required to comply with the auditor attestation
requirements of Section 404(b) of the Sarbanes-Oxley Act, being permitted to have an extended transition period for
adopting any new or revised accounting standards that may be issued by the FASB or the SEC, reduced disclosure
obligations regarding executive compensation and exemptions from the requirements of holding a nonbinding advisory
vote on executive compensation and shareholder approval of any golden parachute payments not previously approved.
We have elected to, and expect to continue to, take advantage of certain of these and other exemptions until we are no
longer an emerging growth company. Further, the JOBS Act allows us to present only two years of audited financial
statements and only two years of related management’s discussion and analysis of financial condition and results of
operations and provide less than five years of selected financial data.
We will remain an emerging growth company until the earliest of (i) the end of the fiscal year during which we
have total annual gross revenues of $1.07 billion or more, (ii) the end of the fiscal year following the fifth anniversary of
the completion of our initial public offering, (iii) the date on which we have, during the previous three-year period,
issued more than $1.0 billion in non-convertible debt and (iv) the end of the first fiscal year in which (A) the market
value of our equity securities that are held by non-affiliates exceeds $700 million as of June 30 of that year, (B) we have
been a public reporting company under the Exchange Act for at least twelve calendar months and (C) we have filed at
least one annual report on Form 10-K.
Because we have elected to use the extended transition period for complying with new or revised accounting
standards for an emerging growth company, our financial statements may not be comparable to companies that
comply with these accounting standards as of the public company effective dates.
We have elected to use the extended transition period for complying with new or revised accounting standards
under Section 7(a)(2)(B) of the Securities Act. This election allows us to delay the adoption of new or revised
accounting standards that have different effective dates for public and private companies until those standards apply to
private companies. As a result of this election, our financial statements may not be comparable to companies that comply
with these accounting standards as of the public company effective dates. Because our financial statements may not be
comparable to companies that comply with public company effective dates, investors may have difficulty evaluating or
comparing our business, financial results or prospects in comparison to other public companies, which may have a
negative impact on the value and liquidity of our common stock. We cannot predict if investors will find our common
stock less attractive because we plan to rely on this exemption. If some investors find our common stock less attractive
as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.
The financial reporting resources we have put in place may not be sufficient to ensure the accuracy of the additional
information we are required to disclose as a publicly listed company.
As a result of being a publicly listed company, we are subject to the heightened financial reporting standards
under GAAP and SEC rules, including more extensive levels of disclosure. Complying with these standards required
enhancements to the design and operation of our internal control over financial reporting as well as additional financial
reporting and accounting staff with appropriate training and experience in GAAP and SEC rules and regulations.
If we are unable to meet the demands that are placed upon us as a public company, including the requirements
of Sarbanes-Oxley, we may be unable to report our financial results accurately, or report them within the timeframes
required by law or stock exchange regulations. Failure to comply with Sarbanes-Oxley, when and as applicable, could
also potentially subject us to sanctions or investigations by the SEC or other regulatory authorities. If material
weaknesses or other deficiencies occur, our ability to report our financial results accurately and timely could be
impaired, which could result in late filings of our annual and quarterly reports under the Exchange Act, restatements of
our consolidated financial statements, a decline in our stock price, suspension or delisting of our common stock from the
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Nasdaq Stock Market, and could have a material adverse effect on our business, financial condition, results of operations
and growth prospects. Even if we are able to report our financial statements accurately and in a timely manner, any
failure in our efforts to implement the improvements or disclosure of material weaknesses in our future filings with the
SEC could cause our reputation to be harmed and our stock price to decline significantly.
We did not perform an evaluation of our internal control over financial reporting, as contemplated by
Section 404 of Sarbanes-Oxley, nor did we engage our independent registered public accounting firm to perform an
audit of our internal control over financial reporting under the standards of the PCAOB as of any balance sheet date
reported in our financial statements as of December 31, 2018. Had we performed such an evaluation or had our
independent registered public accounting firm performed an audit of our internal control over financial reporting under
the standards of PCAOB, material weaknesses may have been identified. In addition, the JOBS Act provides that, so
long as we qualify as an emerging growth company, we will be exempt from the provisions of Section 404(b) of
Sarbanes-Oxley, which would require that our independent registered public accounting firm provide an attestation
report on the effectiveness of our internal control over financial reporting under the standards of PCAOB. We may take
advantage of this exemption so long as we qualify as an emerging growth company.
Certain banking laws and certain provisions of our amended and restated articles of incorporation may have an
anti-takeover effect.
Provisions of federal banking laws, including regulatory approval requirements, could make it difficult for a
third party to acquire us, even if doing so would be perceived to be beneficial to our shareholders. Acquisition of 10% or
more of any class of voting stock of a bank holding company or depository institution, including shares of our common
stock, generally creates a rebuttable presumption that the acquirer “controls” the bank holding company or depository
institution. Also, a bank holding company must obtain the prior approval of the Federal Reserve before, among other
things, acquiring direct or indirect ownership or control of more than 5% of the voting shares of any bank, including the
Bank.
There are also provisions in our amended and restated articles of incorporation and amended and restated
bylaws, such as the classification of our board of directors and limitations on the ability to call a special meeting of our
shareholders, that may be used to delay or block a takeover attempt. In addition, our board of directors is authorized
under our amended and restated articles of incorporation to issue shares of preferred stock, and determine the rights,
terms conditions and privileges of such preferred stock, without shareholder approval. These provisions may effectively
inhibit a non-negotiated merger or other business combination, which, in turn, could have a material adverse effect on
the market price of our common stock.
Our amended and restated bylaws have an exclusive forum provision, which could limit a shareholder’s ability to
obtain a favorable judicial forum for disputes with us or our directors, officers or other employees.
Our amended and restated bylaws have an exclusive forum provision providing that, unless we consent in
writing to an alternative forum, the state or federal courts in Hennepin County, Minnesota shall be the sole and exclusive
forum for (i) any derivative action or proceeding brought on behalf of the Company, (ii) any action asserting a claim for
breach of a fiduciary duty owed by any director, officer, employee, or agent of the Company to the Company or the
Company’s shareholders, (iii) any action asserting a claim arising pursuant to any provision of the Minnesota Business
Corporation Act, the articles or the bylaws of the Company, or (iv) any action asserting a claim governed by the internal
affairs doctrine, in each case subject to said courts having personal jurisdiction over the indispensable parties named as
defendants therein. Any person purchasing or otherwise acquiring any interest in any shares of our capital stock shall be
deemed to have notice of and to have consented to this provision of our bylaws. The exclusive forum provision may
limit a shareholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our
directors, officers or other employees, which may discourage such lawsuits. Alternatively, if a court were to find the
exclusive forum provision to be inapplicable or unenforceable in an action, we may incur additional costs associated
with resolving such action in other jurisdictions, which could have a material adverse effect on our business, financial
condition, results of operations and growth prospects.
37
Market and Interest Rate Risks
Our business is subject to interest rate risk, and fluctuations in interest rates may adversely affect our earnings.
Fluctuations in interest rates may negatively affect our business and may weaken demand for some of our
products. Our earnings and cash flows are largely dependent on our net interest income, which is the difference between
the interest income that we earn on interest earning assets, such as loans and investment securities, and the interest
expense that we pay on interest bearing liabilities, such as deposits and borrowings. Additionally, changes in interest
rates also affect our ability to fund our operations with client deposits and the fair value of securities in our investment
portfolio. Therefore, any change in general market interest rates, including changes in federal fiscal and monetary
policies, can have a significant effect on our net interest income and results of operations.
Our interest earning assets and interest bearing liabilities may react in different degrees to changes in market
interest rates. Interest rates on some types of assets and liabilities may fluctuate prior to changes in broader market
interest rates, while rates on other types of assets and liabilities may lag behind. The result of these changes to rates may
cause differing spreads on interest earning assets and interest bearing liabilities. We cannot control or accurately predict
changes in market rates of interest.
Interest rates are volatile and highly sensitive to many factors that are beyond our control, such as economic
conditions and policies of various governmental and regulatory agencies, and, in particular U.S. monetary policy. For
example, we face uncertainty regarding the interest rate risk, and resulting effect on our portfolio, that could result when
the Federal Reserve reduces the amount of securities it holds on its balance sheet. In recent years, it has been the policy
of the Federal Reserve to maintain interest rates at historically low levels through a targeted federal funds rate and the
purchase of U.S. Treasury and mortgage-backed securities. As a result, yields on securities we have purchased, and
market rates on the loans we have originated, have generally been at levels lower than were available prior to the
financial crisis. Consequently, the average yield on the Bank’s interest-earning assets has generally decreased during the
current low interest rate environment. If a low interest rate environment persists, we may be unable to increase our net
interest income.
As of December 31, 2018, we had $369.2 million of noninterest bearing deposit accounts and $1.19 billion of
interest bearing deposit accounts. We do not know what market rates will be, especially if the Federal Reserve continues
to increase interest rates in the near term. If we need to offer higher interest rates on these accounts to maintain current
clients or attract new clients, our interest expense will increase, perhaps materially. Furthermore, if we fail to offer
interest in a sufficient amount to keep these demand deposits, our core deposits may be reduced, which would require us
to obtain funding in other ways or risk slowing our future asset growth.
We could recognize losses on securities held in our securities portfolio, particularly if interest rates increase or
economic and market conditions deteriorate.
As of December 31, 2018, the fair value of our securities portfolio was approximately $253.4 million, or 12.8%
of our total assets. Factors beyond our control can significantly influence the fair value of securities in our portfolio and
can cause potential adverse changes to the fair value of these securities. For example, fixed-rate securities acquired by us
are generally subject to decreases in market value when interest rates rise. Additional factors include, but are not limited
to, rating agency downgrades of the securities or our own analysis of the value of the security, defaults by the issuer or
individual mortgagors with respect to the underlying securities and instability in the credit markets. Any of the foregoing
factors could cause an other than temporary impairment in future periods and result in realized losses. The process for
determining whether impairment is other than temporary usually requires difficult, subjective judgments about the future
financial performance of the issuer and any collateral underlying the security in order to assess the probability of
receiving all contractual principal and interest payments on the security. Because of changing economic and market
conditions affecting interest rates, the financial condition of issuers of the securities and the performance of the
underlying collateral, we may recognize realized or unrealized losses in future periods, which could have a material
adverse effect on our business, financial condition, results of operations and growth prospects.
38
Monetary policies and regulations of the Federal Reserve could adversely affect our operations.
In addition to being affected by general economic conditions, our earnings and growth are affected by the
policies of the Federal Reserve. An important function of the Federal Reserve is to regulate the money supply and credit
conditions. Among the instruments used by the Federal Reserve to implement these objectives are open market
purchases and sales of U.S. government securities, adjustments of the discount rate and changes in banks’ reserve
requirements against bank deposits. These instruments are used in varying combinations to influence overall economic
growth and the distribution of credit, bank loans, investments and deposits. Their use also affects interest rates charged
on loans or paid on deposits.
The monetary policies and regulations of the Federal Reserve have had a significant effect on the operating
results of commercial banks in the past and are expected to continue to do so in the future. The effects of such policies
upon our business, financial condition, results of operations and growth prospects cannot be predicted.
Our stock is relatively thinly traded.
Although our common stock is traded on the Nasdaq Stock Market, the average daily trading volume of our
common stock is relatively low compared to many public companies. The desired market characteristics of depth,
liquidity, and orderliness require the substantial presence of willing buyers and sellers in the marketplace at any given
time. In our case, this presence depends on the individual decisions of a relatively small number of investors and general
economic and market conditions over which we have no control. Due to the relatively low trading volume of our
common stock, significant sales of our common stock, or the expectation of these sales, could cause the stock price to
fall more than would be justified by the inherent worth of the Company. Conversely, attempts to purchase a significant
amount of our stock could cause the market price to rise above the reasonable inherent worth of the Company.
The price of our common stock could be volatile and other factors could cause our stock price to decline.
Stock price volatility may make it more difficult for you to resell your common stock when you want and at
prices you find attractive. The market price of our common stock may be volatile and could be subject to wide
fluctuations in price in response to various factors, some of which are beyond our control. These factors include, among
other things:
•
•
•
•
•
•
•
•
•
•
actual or anticipated variations in our quarterly results of operations;
recommendations or research reports about us or the financial services industry in general published by
securities analysts;
the failure of securities analysts to cover, or continue to cover;
operating and stock price performance of other companies that investors or analysts deem comparable to
us;
news reports relating to trends, concerns and other issues in the financial services industry;
perceptions in the marketplace regarding us, our competitors or other financial institutions;
future sales of our common stock;
departure of members of our strategic leadership team or other key personnel;
new technology used, or services offered, by competitors;
significant acquisitions or business combinations, strategic partnerships, joint ventures or capital
commitments by or involving us or our competitors;
39
•
•
•
changes or proposed changes in laws or regulations, or differing interpretations of existing laws and
regulations, affecting our business, or enforcement of these laws and regulations;
litigation and governmental investigations; and
geopolitical conditions such as acts or threats of terrorism or military conflicts.
In addition, if the market for stocks in our industry, or the stock market in general, experiences a loss of
investor confidence, the trading price of our common stock could decline for reasons unrelated to our business, financial
condition, results of operations or growth prospects. If any of the foregoing occurs, it could cause our stock price to fall
and may expose us to lawsuits that, even if unsuccessful, could be costly to defend and a distraction to management.
An investment in our common stock is not an insured deposit.
An investment in our common stock is not a bank deposit and, therefore, is not insured against loss by the
FDIC, any other deposit insurance fund or by any other public or private entity. Investment in our common stock is
inherently risky for the reasons described in this report, and is subject to the same market forces that affect the price of
common stock in any company. As a result, if you acquire our common stock, you could lose some or all of your
investment.
Our ability to pay dividends may be limited, and we do not intend to pay cash dividends on our common stock in the
foreseeable future. Consequently, your ability to achieve a return on your investment will depend on appreciation in
the price of our common stock.
Holders of our common stock are entitled to receive only such dividends as our board of directors may declare
out of funds legally available for such payments. We expect that we will retain all earnings, if any, for operating capital,
and we do not expect our board of directors to declare any dividends on our common stock in the foreseeable future.
Even if we have earnings in an amount sufficient to pay cash dividends, our board of directors may decide to retain
earnings for the purpose of funding growth. We cannot assure you that cash dividends on our common stock will ever be
paid. You should not purchase shares of common stock offered hereby if you need or desire dividend income from this
investment.
In addition, we are a financial holding company, and our ability to declare and pay dividends is dependent on
certain federal regulatory considerations, including the guidelines of the Federal Reserve regarding capital adequacy and
dividends. It is the policy of the Federal Reserve that bank and financial holding companies should generally pay
dividends on capital stock only out of earnings, and only if prospective earnings retention is consistent with the
organization’s expected future needs, asset quality and financial condition.
Further, if we are unable to satisfy the capital requirements applicable to us for any reason, we may not be able
to make, or may have to reduce or eliminate, the payment of dividends on our common stock in the event we decide to
declare dividends. Any change in the level of our dividends or the suspension of the payment thereof could have a
material adverse effect on the market price of our common stock.
Future issuances of common stock could result in dilution, which could cause our common stock price to decline.
We are generally not restricted from issuing additional shares of our common stock, up to the 75,000,000 shares
of common stock in our amended and restated articles of incorporation, which could be increased by a vote of the
holders of a majority of our shares of common stock. We may issue additional shares of our common stock in the future
pursuant to current or future equity compensation plans, upon conversions of preferred stock or debt, or in connection
with future acquisitions or financings. If we choose to raise capital by selling shares of our common stock for any
reason, the issuance would have a dilutive effect on the holders of our common stock and could have a material negative
effect on the market price of our common stock.
40
The holders of our debt obligations and preferred stock, if any, will have priority over our common stock with respect
to payment in the event of liquidation, dissolution or winding up and with respect to the payment of interest and
dividends.
In any liquidation, dissolution or winding up of the Company, our common stock would rank below all claims
of debt holders against us and claims of all of our outstanding shares of preferred stock. As of December 31, 2018, we
had $15.0 million of senior indebtedness and $25.0 million of subordinated debentures outstanding. We do not currently
have any shares of preferred stock outstanding. As a result, holders of our common stock will not be entitled to receive
any payment or other distribution of assets upon the liquidation, dissolution or winding up of the Company until after all
of our obligations to our debt holders have been satisfied and holders of senior equity securities, including preferred
shares, if any, have received any payment or distribution due to them.
We cannot guarantee that our stock repurchase program will be fully implemented or that it will enhance long-term
shareholder value.
In January 2019, the Company’s board of directors approved a stock repurchase program, which authorizes the
Company to repurchase up to $15 million of its common stock, subject to certain limitations and conditions. The
repurchase program was effective immediately and will continue for a period of 24 months. The repurchase program
does not obligate the Company to repurchase any shares of its common stock, and there is no assurance that the
Company will do so or that the Company will repurchase shares at favorable prices. The repurchase program may be
suspended or terminated at any time and, even if fully implemented, the program may not enhance long-term shareholder
value.
ITEM 1.B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our corporate headquarters is located at 3800 American Boulevard West, Suite 100, Bloomington, Minnesota
55431. In addition to our corporate headquarters, we operate six branch offices located in the Twin Cities MSA. We own
three of our branch offices located in Orono, St. Louis Park and Minneapolis (Hennepin Avenue), and we lease our
headquarters space, and the remainder of our retail branch offices. Additional information regarding our locations is set
forth below.
Branch Locations:
3800 American Boulevard West, Various Suites,
Square
Ownership Footage
Term
Bloomington, Minnesota 55431 . . . . . . . . . . . . . . . . . . . . . Leased
21500 Highway 7, Greenwood, Minnesota 55331 . . . . . . . . . Leased
Northstar Center West, 625 Marquette Avenue, Suite
#W0100, Minneapolis, Minnesota 55402 . . . . . . . . . . . . . . Leased
4400 Excelsior Boulevard, St. Louis Park, Minnesota 55416 . Owned
2445 Shadywood Road, Orono, Minnesota 55331 . . . . . . . . . Owned
3100 Hennepin Avenue, Minneapolis, Minnesota 55408(1) . . . Owned
370 Wabasha Street N., St. Paul, Minnesota 55102. . . . . . . . . Leased
18,510 Term expires September 2020; renewable at the Bank's option
5,640 Term expires August 2021; renewable at the Bank's option
1,771 Term expires June 2022; renewable at the Bank's option
4,057 N/A
4,100 N/A
4,500 N/A
10,820 Term expires January 2029; renewable at the Bank's option
(1) Does not include the leased drive-up property located adjacent to the branch.
ITEM 3. 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
41
Company does not know of any proceeding contemplated by a governmental authority against the Company or any of its
subsidiaries.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock began trading on the Nasdaq Stock Market (“Nasdaq”) under the symbol “BWB” on
March 14, 2018. Prior to that, there was no public market for our common stock.
As of February 25, 2019, the Company had 121 holders of record of the Company’s common stock and an
estimated 1,630 additional beneficial holders of the Company’s common stock whose stock was held in street name by
brokerages or fiduciaries.
Issuer Purchases of Equity Securities
On January 24, 2019, the Company’s board of directors approved a stock repurchase program (the “Program”)
which authorizes the Company to repurchase up to $15 million of its common stock, subject to certain limitations and
conditions. The Program was effective immediately and will continue for a period of 24 months. The Program does not
obligate the Company to repurchase any shares of its common stock, and there is no assurance that the Company will do
so. Under the Program, the Company may repurchase shares of common stock from time to time in open market or
privately negotiated transactions. The extent to which the Company repurchases its shares, and the timing of such
repurchases, will depend upon a variety of factors, including general market and economic conditions, regulatory
requirements, availability of funds, and other relevant considerations, as determined by the Company. The Company
may, in its discretion, begin, suspend or terminate repurchases at any time prior to the Program’s expiration, without any
prior notice. No repurchases were made of the Company’s common stock during 2018 or 2017.
42
Performance Graph
COMPARISON OF 9 MONTH CUMULATIVE TOTAL RETURN*
Among Bridgewater Bancshares Inc., the NASDAQ Composite Index
and the NASDAQ Bank Index
$120
$110
$100
$90
$80
$70
$60
3/14/18
3/18
6/18
9/18
12/18
Bridgewater Bancshares Inc.
NASDAQ Composite
NASDAQ Bank
*$100 invested on 3/14/18 in stock or 2/28/18 in index, including reinvestment of dividends.
Fiscal year ending December 31.
Dividend Policy
The Company has not historically declared or paid dividends on common stock and does not intend to declare
or pay dividends on common stock in the foreseeable future. Instead, the Company anticipates that future earnings will
be retained to support its operations and to finance the growth and development of the business. Any future
determination relating to the Company’s dividend policy will be made by the board of directors and will depend on a
number of factors, including historic and projected financial condition, liquidity and results of operations, capital levels
and needs, tax considerations, any acquisitions or potential acquisitions that may be pursued, statutory and regulatory
prohibitions and other limitations, the terms of any credit agreements or other borrowing arrangements that restrict the
ability to pay cash dividends, general economic conditions and other factors deemed relevant by the board of directors.
The Company is not obligated to pay dividends on its common stock and is subject to restrictions on paying dividends
on common stock.
Dividend Restrictions
As a Minnesota corporation, the Company is subject to certain restrictions on dividends under the Minnesota
Business Corporation Act, as amended. Generally, a Minnesota corporation is prohibited from paying a dividend if, after
giving effect to the dividend the corporation would not be able to pay its debts as the debts become due in the usual
course of business, or the corporation's total assets would be less than the sum of its total liabilities, plus the amount that
would be needed, if the corporation were to be dissolved at the time of the distribution, to satisfy the preferential rights
upon dissolution of shareholders whose preferential rights are superior to those receiving the distribution.
In addition, the Company is subject to certain restrictions on the payment of cash dividends as a result of
banking laws, regulations and policies. See "Supervision and Regulation—Supervision and Regulation of the
Company—Dividend Payments." Because the Company is a financial holding company and does not engage directly in
business activities of a material nature, the ability to pay dividends to shareholders depends, in large part, upon receipt of
dividends from the Bank, which is also subject to numerous limitations on the payment of dividends under federal and
43
state banking laws, regulations and policies. See "Supervision and Regulation—Supervision and Regulation of the
Bank—Dividend Payments."
Under the terms of a loan agreement with a third party correspondent lender which the Company entered into in
February of 2016, the Company cannot declare or pay any cash dividend or make any other distribution in respect to
capital stock without the prior written consent of the lender. In addition, under the terms of the subordinated notes issued
in July of 2017, and the related subordinated note purchase agreements, the Company is not permitted to declare or pay
any dividends on capital stock if an event of default occurs under the terms of the subordinated notes, excluding any
dividends or distributions in shares of, or options, warrants or rights to subscribe for or purchase shares of, any class of
our common stock and any declaration of a non-cash dividend in connection with the implementation of a shareholders'
rights plan.
Unregistered Sales of Equity Securities
On October 25, 2018, the Company entered into Exchange Agreements (the “Exchange Agreements”) with
Castle Creek Capital Partners V, LP, EJF Sidecar Fund, Series LLC – Series E and Endeavour Regional Bank
Opportunities Fund II LP (collectively, the “Investors”), providing for the exchange of a total of 2,823,542 shares of the
Company’s non-voting common stock, par value $0.01 per share, for 2,823,542 shares of the Company’s common stock,
par value $0.01 per share. The non-voting common stock was originally issued to the Investors in private placement
transactions that were completed in 2015 and 2016, and was issued to enable the equity ownership of the Investors to
comply with applicable banking laws and regulations. The Exchange Agreements contain customary representations,
warranties and covenants made by each of the Investors and the Company. A member of the Company’s board of
directors, David J. Volk, is a principal at Castle Creek Capital, LLC, which is the sole general partner of Castle Creek
Capital Partners V, LP.
Pursuant to the terms of the Company’s amended and restated articles of incorporation, the non-voting common
stock was convertible into common stock, subject to certain limitations. The number of shares that the Investors received
pursuant to the Exchange Agreements is equal to the number of shares of common stock that the Investors would have
received upon conversion of the non-voting common stock. The exchange transactions were effected because the non-
voting common stock could only be converted at the time of a transfer or sale of the non-voting common stock that
satisfied certain conditions set forth in the amended and restated articles of incorporation. The common stock issued
upon exchange of the non-voting common stock was offered and exchanged in reliance on exemptions from registration
provided by Sections 3(a)(9) and 18(b)(4) of the Securities Act of 1933, as amended.
Use of Proceeds from Registered Securities
On March 16, 2018, the Company sold 5,379,513 shares of common stock in its initial public offering,
including 1,005,000 shares of common stock sold pursuant to the exercise in full by the underwriters of their option to
purchase additional shares to cover over-allotments. All of the shares were sold pursuant to the Company’s Registration
Statement on Form S-1, as amended (File No. 333-223019), which was declared effective by the SEC on March 13,
2018.
There has been no material change in the planned use of proceeds from the initial public offering as described
in the Company’s prospectus filed with the SEC on March 14, 2018 pursuant to Rule 424(b)(4) under the Securities Act
of 1933. From the effective date of the registration statement through December 31, 2018, the Company has contributed
$25.0 million of the net proceeds of the initial public offering to the Bank.
ITEM 6. SELECTED FINANCIAL DATA
The following consolidated selected financial data is derived from the Company’s audited consolidated
financial statements as of and for the five years ended December 31, 2018. This information should be read in
connection with our audited consolidated financial statements, related notes and “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” appearing elsewhere in this report.
44
2018
As of and for the year ended December 31,
2015
2016
2017
2014
Per Common Share Data (1)
Basic Earnings Per Share . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted Earnings Per Share . . . . . . . . . . . . . . . . . . . . . . . .
Book Value Per Share . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tangible Book Value Per Share (2) . . . . . . . . . . . . . . . . . . .
Basic Weighted Average Shares Outstanding . . . . . . . . . . .
Diluted Weighted Average Shares Outstanding . . . . . . . . .
Shares Outstanding at Period End . . . . . . . . . . . . . . . . . . .
0.93
0.91
7.34
7.22
29,001,393
29,436,214
30,097,274
$
0.69
0.68
5.56
5.40
24,604,464
25,017,690
24,679,861
$
0.59
0.58
4.69
4.53
22,294,837
22,631,741
24,589,861
$
0.65
0.64
4.05
4.05
17,269,448
17,606,253
19,819,349
$
0.63
0.60
3.36
3.36
15,877,647
16,506,363
15,979,325
Selected Performance Ratios
Return on Average Assets (ROA) . . . . . . . . . . . . . . . . . . .
Return on Average Common Equity (ROE) . . . . . . . . . . . .
Return on Average Tangible Common Equity (2) . . . . . . . . .
Yield on Interest Earning Assets . . . . . . . . . . . . . . . . . . . .
Yield on Total Loans, Gross . . . . . . . . . . . . . . . . . . . . . . .
Cost of Interest Bearing Liabilities . . . . . . . . . . . . . . . . . . .
Cost of Total Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Interest Margin (3) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Efficiency Ratio (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjusted Efficiency Ratio (5) . . . . . . . . . . . . . . . . . . . . . . .
Noninterest Expense to Average Assets . . . . . . . . . . . . . . .
Adjusted Noninterest Expense to Average Assets (5) . . . . . .
Loan to Deposit Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Core Deposits to Total Deposits . . . . . . . . . . . . . . . . . . . . .
Tangible Common Equity to Tangible Assets (2) . . . . . . . . .
Selected Asset Quality Data
Loans 30-89 Days Past Due . . . . . . . . . . . . . . . . . . . . . . . . $
Loans 30-89 Days Past Due to Total Loans . . . . . . . . . . . .
Nonperforming Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Nonperforming Loans to Total Loans . . . . . . . . . . . . . . . .
Foreclosed Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Nonaccrual Loans to Total Loans . . . . . . . . . . . . . . . . . . .
Nonaccrual Loans and Loans Past Due 90 Days and Still
Accruing to Total Loans . . . . . . . . . . . . . . . . . . . . . . . . .
Nonperforming Assets (4) . . . . . . . . . . . . . . . . . . . . . . . . . . $
Nonperforming Assets to Total Assets (4) . . . . . . . . . . . . . .
Allowance for Loan Losses to Total Loans. . . . . . . . . . . . .
Allowance for Loans Losses to Nonperforming Loans . . . .
Net Loan Charge-Offs (Recoveries) to Average Loans . . . .
Capital Ratios (Bank Only)
Tier 1 Leverage Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tier 1 Risk-based Capital Ratio . . . . . . . . . . . . . . . . . . . . .
Total Risk-based Capital Ratio . . . . . . . . . . . . . . . . . . . . .
Capital Ratios (Consolidated)
Tier 1 Leverage Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tier 1 Risk-based Capital Ratio . . . . . . . . . . . . . . . . . . . . .
Total Risk-based Capital Ratio . . . . . . . . . . . . . . . . . . . . .
Growth Ratios
Percentage Change in Total Assets . . . . . . . . . . . . . . . . . .
Percentage Change in Total Loans, Gross . . . . . . . . . . . . .
Percentage Change in Total Deposits . . . . . . . . . . . . . . . . .
Percentage Change in Shareholders' Equity . . . . . . . . . . . .
Percentage Change in Net Income . . . . . . . . . . . . . . . . . . .
Percentage Change in Diluted Earnings Per Share . . . . . . .
Percentage Change in Tangible Book Value Per Share (2) . .
1.51 %
13.87
14.15
4.88
5.23
1.65
1.12
3.72
46.5
41.7
1.78
1.59
106.7
74.2
11.03
311
$
0.02 %
581
$
0.03 %
-
$
0.03 %
1.16 % (6)
(6)
13.18
13.60
4.76
5.10
1.19
0.80
3.92
44.4
41.1
1.76
1.62
100.6
76.7
8.26
$
664
0.05 %
1,139
0.08 %
581
0.08 %
$
$
0.03
$
581
0.03 %
1.20
3,447.68
0.00
$
0.08
1,720
0.11 %
1.22
1,448.81
0.00
1.20 %
12.88
13.23
4.78
5.20
1.09
0.76
4.00
45.8
N/A
1.84
N/A
97.8
77.2
8.86
$
677
0.07 %
2,323
$
0.23 %
4,183
$
0.23 %
0.23
$
6,506
0.52 %
1.23
530.91
0.11
1.39 %
17.50
17.50
4.99
5.37
1.08
0.77
4.18
43.6
N/A
1.84
N/A
104.9
79.4
8.63
1,087
$
0.14 %
2,338
$
0.29 %
726
$
0.29 %
1.51 %
20.49
20.49
5.19
5.82
0.91
0.64
4.49
40.6
N/A
1.82
N/A
99.5
83.2
7.65
1,225
0.20 %
923
0.15 %
2,944
0.15 %
0.29
$
3,064
0.33 %
1.26
429.94
0.14
0.15
3,867
0.55 %
1.59
1,028.06
0.07
10.82 %
11.63
12.76
9.83 %
11.15
12.37
9.24 %
11.38
12.63
9.49 %
11.06
12.31
9.70 %
11.47
12.73
11.23 %
12.07
14.55
8.38 %
9.49
12.46
9.44 %
11.49
12.74
8.89 %
10.34
11.59
7.75 %
9.15
10.41
22.1 %
23.6
16.5
61.1
59.4
35.5
33.7
28.3 %
34.6
30.9
18.9
27.8
15.6
19.3
35.7 %
25.2
34.3
43.9
18.0
(8.2)
11.9
32.3 %
33.6
26.7
49.2
12.8
5.7
20.3
21.9 %
25.5
15.2
26.9
53.8
34.6
25.8
(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% for 2018 and 35% for 2017.
45
(4) Nonperforming assets are defined as nonaccrual loans plus loans 90 days past due plus foreclosed assets.
(5) Ratio excludes the amortization of tax credit investments and represents a non-GAAP financial measure. See "Non-GAAP Financial Measures"
for further details.
(6) ROA and ROE, excluding a one-time additional expense of $2.0 million related to the revaluation of the deferred tax asset, would have been
1.30% and 14.75%, respectively for the year ended December 31, 2017.
(dollars in thousands)
Selected Balance Sheet Data
2018
As of and for the year ended December 31,
2015
2016
2017
2014
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,973,741 $ 1,616,612 $ 1,260,394 $ 928,686 $ 702,175
598,547
1,664,931
Total Loans, Gross . . . . . . . . . . . . . . . . . . . . . . . . .
9,489
20,031
Allowance for Loan Losses . . . . . . . . . . . . . . . . . .
70,022
253,378
Securities Available for Sale . . . . . . . . . . . . . . . . .
—
3,678
Goodwill and Other Intangibles . . . . . . . . . . . . . . .
1,000,739
12,333
217,083
4,060
1,347,113
16,502
229,491
3,869
799,497
10,052
100,769
—
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Funds Purchased . . . . . . . . . . . . . . . . . . . .
FHLB Advances and Notes Payable . . . . . . . . . . .
Subordinated Debentures, Net of Issuance Costs .
Tangible Common Equity (1) . . . . . . . . . . . . . . . . .
Total Shareholders' Equity . . . . . . . . . . . . . . . . . . .
Average Total Assets . . . . . . . . . . . . . . . . . . . . . . .
Average Common Equity . . . . . . . . . . . . . . . . . . . .
1,560,934
18,000
139,000
24,630
217,320
220,998
1,777,592
194,083
1,339,350
23,000
85,000
24,527
133,293
137,162
1,451,732
128,123
1,023,508
44,000
72,000
—
111,306
115,366
1,098,654
102,588
761,882
13,000
69,042
1,500
80,178
80,178
806,625
63,981
601,373
10,000
34,000
1,500
53,738
53,738
656,826
48,443
(1) Represents a non-GAAP financial measure. See “Non-GAAP Financial Measures” for further details.
(dollars in thousands)
Selected Income Statement Data
2018
As of and for the year ended December 31,
2016
2017
2015
2014
Interest Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 85,226
20,488
Interest Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
64,738
Net Interest Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,575
Provision for Loan Losses . . . . . . . . . . . . . . . . . . . . . . . . . . . .
61,163
Net Interest Income after Provision for Loan Losses . . . . .
2,543
Noninterest Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
31,562
Noninterest Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
32,144
Income Before Income Taxes . . . . . . . . . . . . . . . . . . . . . . . .
5,224
Provision for Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . .
66,346 $ 50,632 $ 39,193 $ 33,384
4,585
12,173
28,799
54,173
1,500
4,175
27,299
49,998
975
2,536
11,983
25,496
16,291
27,038
6,365
10,149
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 26,920 $ 16,889 $ 13,215 $ 11,195 $ 9,926
6,498
32,695
1,500
31,195
1,872
14,817
18,250
7,055
8,514
42,118
3,250
38,868
2,567
20,168
21,267
8,052
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
The following discussion and analysis of our results of operations and financial condition should be read in
conjunction with the ‘‘Selected Financial Data’’ and our consolidated financial statements and related notes included
elsewhere in this report. In addition to historical information, this discussion and analysis contains forward-looking
statements that involve risks, uncertainties and assumptions. Certain risks, uncertainties and other factors, including but
not limited to those set forth under ‘‘Forward-Looking Statements,’’ ‘‘Risk Factors’’ and elsewhere in this report, may
cause actual results to differ materially from those projected in the forward looking statements. We assume no
obligation to update any of these forward-looking statements. Readers of our Annual Report on Form 10-K should
consider these risks and uncertainties in evaluating forward-looking statements and should not place undue reliance on
forward-looking statements.
46
Overview
The Company is a financial holding company headquartered in Bloomington, Minnesota, which is currently
celebrating thirteen years of successful operations. 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 this report. 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.
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
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.
47
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.
Results of Operations
Net Income
2018 compared to 2017
Net income was $26.9 million for the year ended December 31, 2018, a 59.4% increase over net income of
$16.9 million for the year ended December 31, 2017. Net income per diluted common share for the year ended
December 31, 2018 was $0.91, a 35.5% increase, compared to $0.68 per diluted common share for the year ended
December 31, 2017. ROA was 1.51% and 1.16% for the years ended December 31, 2018 and 2017, respectively. ROE
was 13.87% and 13.18% for the years ended December 31, 2018 and 2017, respectively.
The year ended 2017 included a one-time additional expense of $2.0 million related to the enactment of the Tax
Cuts and Jobs Act. Excluding the one-time impact of the Tax Cuts and Jobs Act, ROA and ROE for the year ended
December 31, 2017 would have been 1.30% and 14.75%, respectively.
2017 compared to 2016
48
Net income was $16.9 million for the year ended December 31, 2017, a 27.8% increase over net income of
$13.2 million for the year ended December 31, 2016. Net income per diluted common share for the year ended
December 31, 2017 was $0.68, a 15.6% increase, compared to $0.58 per diluted common share for the year ended
December 31, 2016. ROA was 1.16% and 1.20% for the years ended December 31, 2017 and 2016, respectively. ROE
was 13.18% and 12.88% for the years ended December 31, 2017 and 2016, respectively.
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 levels of interest rates. The difference between the
average yield on earning assets and the average rate paid for interest bearing liabilities is the net interest spread.
Noninterest bearing sources of funds, such as demand deposits and shareholders’ equity, also support earning assets. The
impact of the noninterest bearing sources of funds is captured in the net interest margin, which is calculated as net
interest income divided by average earning assets. Both the net interest margin and net interest spread are presented on a
tax-equivalent basis, which means that tax-free interest income has been adjusted to pretax-equivalent income, assuming
a 21% federal tax rate beginning in 2018. A 35% federal tax rate has been applied to periods prior to 2018.
Management’s ability to respond to changes in interest rates by effective asset-liability management techniques is critical
to maintaining net interest margin and the momentum of the Company’s primary source of earnings.
Average Balances and Yields
The following table shows, for the years ended December 31, 2018, 2017, and 2016, 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.
49
(dollars in thousands)
Interest Earning Assets:
Cash Investments . . . . . . . . . . . . $
Investment Securities:
Taxable Investment Securities . .
Tax-Exempt Investment
December 31, 2018
December 31, 2017
December 31, 2016
Average
Balance
Interest
& Fees
Yield/
Rate
Average
Balance
Interest
& Fees
Yield/
Rate
Average
Balance
Interest
& Fees
Yield/
Rate
22,962 $
250 1.09 % $
25,306 $
226 0.89 % $
32,186 $
267 0.83 %
129,486
2,878 2.22
102,115
1,892 1.85
68,722
1,041 1.51
Securities (1) . . . . . . . . . . . . . .
116,557
4,830 4.14
130,289
6,289 4.83
87,226
4,012 4.60
Total Investment
Securities . . . . . . . . . . . .
7,708 3.13
Loans (2) . . . . . . . . . . . . . . . . . . . 1,491,166 78,033 5.23
Federal Home Loan Bank
246,043
232,404
8,181 3.52
1,177,491 60,024 5.10
155,948
5,053 3.24
896,915 46,622 5.20
Stock . . . . . . . . . . . . . . . . . . . .
6,321
249 3.94
4,288
115 2.68
3,583
94 2.62
Total Interest
Earning Assets . . . . . . . . 1,766,492 86,240 4.88 % 1,439,489 68,546 4.76 % 1,088,632 52,036 4.78 %
Noninterest Earning Assets . . . .
11,100
Total Assets . . . . . . . . . . . . $ 1,777,592
12,243
$ 1,451,732
10,022
$ 1,098,654
Interest Bearing Liabilities:
Interest Bearing Transaction
Deposits . . . . . . . . . . . . . . . . .
177,335
635 0.36 %
161,454
389 0.24 %
133,130
401 0.30 %
Savings and Money
Market Deposits . . . . . . . . . . .
Time Deposits . . . . . . . . . . . . . .
Brokered Deposits . . . . . . . . . . .
Federal Funds Purchased . . . . . .
Notes Payable . . . . . . . . . . . . . .
FHLB Advances . . . . . . . . . . . .
Subordinated Debentures . . . . . .
381,318
300,021
232,022
29,671
15,750
82,562
24,582
4,681 1.23
5,731 1.91
4,924 2.12
637 2.15
594 3.77
1,718 2.08
1,568 6.38
284,641
286,840
185,144
15,247
17,750
56,458
12,253
2,218 0.78
4,360 1.52
2,752 1.49
169 1.11
656 3.70
880 1.56
749 6.11
199,525
236,641
125,414
8,852
19,275
54,599
229
1,411 0.71
3,496 1.48
1,647 1.31
56 0.63
718 3.73
769 1.41
16 7.00
Total Interest
Bearing Liabilities . . . . . 1,243,261 20,488 1.65 % 1,019,787 12,173 1.19 %
777,665
8,514 1.09 %
Noninterest Bearing
Liabilities:
Noninterest Bearing
Transaction Deposits . . . . . . .
330,898
Other Noninterest
Bearing Liabilities . . . . . . . . .
9,350
Total Noninterest
Bearing Liabilities . . . . .
Shareholders' Equity . . . . . . . . .
Total Liabilities and
340,248
194,083
299,232
4,590
303,822
128,123
214,490
3,911
218,401
102,588
Shareholders' Equity . . . . . . . . $ 1,777,592
$ 1,451,732
$ 1,098,654
Net Interest Income / Interest
Rate Spread . . . . . . . . . . . . . .
Net Interest Margin (3) . . . . . . . .
Taxable Equivalent
Adjustment:
Tax-Exempt Investment
Securities . . . . . . . . . . . . . .
Net Interest Income . . . . . . . . . .
65,752 3.23 %
3.72 %
56,373 3.57 %
3.92 %
43,522 3.69 %
4.00 %
(1,014)
$ 64,738
(2,200)
$ 54,173
(1,404)
$ 42,118
(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% in
2018 and 35% in 2017 and 2016.
(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.
50
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 table presents the changes in the volume and rate of interest bearing assets and
liabilities for the year ended December 31, 2018, compared to the year ended December 31, 2017, and for the year ended
December 31, 2017, compared to the year ended December 31, 2016.
(dollars in thousands)
Interest Earning Assets:
Year Ended December 31, 2018
Compared with
Year Ended December 31, 2017
Change Due To:
Volume Rate
Year Ended December 31, 2017
Compared with
Year Ended December 31, 2016
Change Due To:
Variance Volume Rate
Interest
Variance
Interest
Cash Investments . . . . . . . . . . . . . . . . . . . . . . . . . .
(21)
45
24
(57)
16
(41)
Investment Securities:
Taxable Investment Securities . . . . . . . . . . . . . . . .
Tax Exempt Investment Securities . . . . . . . . . . . .
Total Securities . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Home Loan Bank Stock . . . . . . . . . . . . . .
507
(663)
(156)
15,990
55
479
(796)
(317)
2,019
79
986
(1,459)
(473)
18,009
134
506
1,981
2,487
14,584
18
Total Interest Earning Assets . . . . . . . . . . . . . . . . $ 15,868 $ 1,826 $ 17,694 $ 17,032 $
Interest Bearing Liabilities:
345
296
641
(1,182)
3
851
2,277
3,128
13,402
21
(522) $ 16,510
Interest Bearing Transaction Deposits . . . . . . . . . .
Savings and Money Market Deposits . . . . . . . . . .
Time Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Brokered Deposits . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Funds Purchased . . . . . . . . . . . . . . . . . . . .
Notes Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FHLB Advances . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subordinated Debentures . . . . . . . . . . . . . . . . . . . .
Total Interest Bearing Liabilities . . . . . . . . . . . . .
(12)
38
807
753
864
200
1,105
697
113
160
(62)
(74)
111
407
733
754
3,659
2,935
Net Interest Income . . . . . . . . . . . . . . . . . . . . . . . . . . $ 12,933 $ (3,554) $ 9,379 $ 13,969 $ (1,118) $ 12,851
208
1,710
1,171
1,475
308
12
431
65
5,380
246
2,463
1,371
2,172
468
(62)
838
819
8,315
85
602
742
784
40
(57)
26
841
3,063
(97)
205
122
321
73
(5)
85
(108)
596
Interest Income, Interest Expense, and Net Interest Margin
2018 Compared to 2017
Net interest income was $64.7 million for the year ended December 31, 2018, an increase of $10.6 million, or
19.5%, compared to $54.2 million for the year ended December 31, 2017. The increase in net interest income was
largely attributable to growth in average interest earning assets, particularly strong organic growth in the loan portfolio.
Net interest margin (on a fully tax-equivalent basis) for the year ended December 31, 2018 was 3.72%,
compared to 3.92% for the year ended December 31, 2017, a decrease of 20 basis points. While net interest margin has
benefitted from the repricing of variable rate loans and the origination of new loans at higher rates, this was outpaced by
increased balances and rates on deposits and borrowings. Furthermore, the lower statutory federal tax rate reduced the
net interest income tax equivalent adjustment by six basis points.
51
Average interest earning assets for the year ended December 31, 2018 increased $327.0 million, or 22.7%, to
$1.77 billion from $1.44 billion for the year ended December 31, 2017. This increase in average interest earning assets
was due to continued organic growth in the loan portfolio as a result of increased loan production. Average interest
bearing liabilities increased $223.5 million, or 21.9%, to $1.24 billion for the year ended December 31, 2018, from
$1.02 billion for the year ended December 31, 2017. The increase in average interest bearing liabilities was due to an
increase in interest bearing deposits, federal funds purchased, FHLB advances, and the issuance of $25.0 million of
subordinated debentures in July of 2017.
Average interest earning assets produced a tax-equivalent yield of 4.88% for year ended December 31, 2018,
compared to 4.76% for the year ended December 31, 2017. The average rate paid on interest bearing liabilities was
1.65% for the year ended December 31, 2018, compared to 1.19% for the year ended December 31, 2017.
Interest Income. Total interest income on a tax-equivalent basis was $86.2 million for the year ended
December 31, 2018, compared to $68.5 million for the year ended December 31, 2017. The $17.7 million, or 25.8%,
increase in total interest income on a tax-equivalent basis was primarily due to organic growth in the loan portfolio.
Interest income on loans for the year ended December 31, 2018 was $78.0 million, compared to $60.0 million
for the year ended December 31, 2017. The $18.0 million, or 30.0%, increase was due to a 26.6% increase in the average
balance of loans outstanding and a 13 basis point increase in the average yield on loans. The increase in the average
balance of loans outstanding was due to organic loan growth. The increase in yield on the loan portfolio resulted
primarily from repricing of variable rate loans and new loan production at yields accretive to the existing portfolio yield.
Interest income on the investment securities portfolio on a fully-tax equivalent basis decreased $473,000, or 5.8%,
during the year ended December 31, 2018 compared to the year ended December 31, 2017, despite a $13.6 million
increase in average balances between the periods.
Interest Expense. Interest expense on interest bearing liabilities increased $8.3 million, or 68.3%, to $20.5
million for the year ended December 31, 2018, compared to $12.2 million for the year ended December 31, 2017, due to
increases in interest rates and average balances of both deposits and borrowings.
Interest expense on deposits increased to $16.0 million for the year ended December 31, 2018, compared to
$9.7 million for the year ended December 31, 2017. The $6.3 million, or 64.3%, increase in interest expense on deposits
was primarily due to the average balance of deposits increasing 18.8% combined with a 41 basis point increase in the
average rate paid. The increase in the average balance of deposits resulted primarily from increases 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 $2.1 million to $4.5 million for the year ended December 31, 2018,
compared to $2.5 million for the year ended December 31, 2017. This increase was primarily due to increased rates and
average balances of federal funds purchased and FHLB advances, offset in part by a reduction in interest expense on
notes payable as a result of a decreased principal balance.
2017 Compared to 2016
Net interest income was $54.2 million for year ended December 31, 2017, an increase of $12.1 million, or
28.6%, compared to $42.1 million for year ended December 31, 2016. The increase in net interest income was largely
attributable to growth in average interest earning assets, particularly strong organic growth in the loan portfolio.
Net interest margin (on a fully tax-equivalent basis) for the year ended December 31, 2017 was 3.92%,
compared to 4.00% for the year ended December 31, 2016, a decrease of 8 basis points. While net interest margin
benefitted from the repricing of variable rate loans and the origination of new loans at higher rates, this was offset by
increased balances and rates on non-core deposits and borrowings.
Average interest earning assets for the year ended December 31, 2017 increased $350.9 million, or 32.2%, to
$1.44 billion from $1.09 billion for the year ended December 31, 2016. This increase in average interest earning assets
52
was due to continued organic growth in the loan portfolio as a result of increased loan production. Average interest
bearing liabilities increased $242.1 million, or 31.1%, to $1.0 billion for the year ended December 31, 2017, from
$777.7 million for the year ended December 31, 2016. The increase in average interest bearing liabilities was primarily
due to an increase in interest bearing deposits, federal funds purchased, and the issuance of $25.0 million of subordinated
debentures in July of 2017.
Average interest earning assets produced a tax-equivalent yield of 4.76% for the year ended December 31,
2017, compared to 4.78% for the year ended December 31, 2016. The average rate paid on interest bearing liabilities was
1.19% for the year ended December 31, 2017, compared to 1.09% for the year ended December 31, 2016.
Interest Income. Total interest income on a tax-equivalent basis was $68.5 million for the year ended
December 31, 2017, compared to $52.0 million for the year ended December 31, 2016. The $16.5 million, or 31.7%,
increase in total interest income on a tax-equivalent basis was primarily due to growth in our loan and investment
securities portfolios.
Interest income on loans for the year ended December 31, 2017 was $60.0 million, compared to $46.6 million
for the year ended December 31, 2016. The $13.4 million, or 28.7%, increase was primarily due to a 31.3% increase in
the average balance of loans outstanding, offset in part by a 10 basis point decrease in the average yield on loans. The
increase in the average balance of loans outstanding was primarily due to loan growth in commercial real estate loans.
The decrease in yield on the loan portfolio resulted primarily from the lagging of repricing from the historic low interest
rate environment and competitive pricing pressure in the market. Interest income on our investment securities portfolio
on a fully-tax equivalent basis increased $3.1 million, or 61.9% to $8.2 million in the year ended December 31, 2017,
compared to the year ended December 31, 2016. Such growth in investment securities was intended to address our rising
loan-to-deposit ratio and further diversify our earning asset composition. Furthermore, meaningful growth in the
investment securities portfolio added necessary on-balance sheet liquidity, as investment securities were more actively
utilized for pledging to public entities.
Interest Expense. Interest expense on interest bearing liabilities increased $3.7 million, or 43.0%, to $12.2
million for the year ended December 31, 2017, compared to $8.5 million for the year ended December 31, 2016,
primarily due to increases in average balances of both deposits and borrowings.
Interest expense on deposits increased to $9.7 million for the year ended December 31, 2017, compared to $7.0
million for the year ended December 31, 2016. The $2.8 million, or 39.7%, increase in interest expense on deposits was
primarily due to the average balance of deposits increasing 32.2% combined with a 4 basis point increase in the average
rate paid.
Interest expense on borrowings increased $895,000 to $2.5 million for the year ended December 31, 2017,
compared to $1.6 million for the year ended December 31, 2016. This increase was primarily due to the issuance of
$25.0 million in subordinated debentures in July 2017, as well as an increased average balance of federal funds
purchased, offset in part by a reduction in interest expense on notes payable as a result of decreased principal balance.
Provision for Loan Losses
2018 Compared to 2017
The allowance for loan losses increased $3.5 million as of December 31, 2018, compared to December 31,
2017, reflecting a provision for loan losses of $3.6 million and net charge-offs of $46,000 during 2018. The provision for
loan losses was $3.6 million for the year ended December 31, 2018, a decrease of $600,000, compared to the provision
for loan losses of $4.2 million for the year ended December 31, 2017, due primarily to continued strength in credit
quality.
The allowance for loan losses at December 31, 2018 represented 1.20% of loans outstanding, compared to
1.22% at December 31, 2017.
53
2017 Compared to 2016
The allowance for loan losses increased $4.2 million as of December 31, 2017, compared to December 31,
2016, reflecting a provision for loan losses of $4.2 million and net charge-offs of $6,000 during 2017. The provision for
loan losses was $4.2 million for the year ended December 31, 2017, an increase of $925,000, compared to the provision
for loan losses of $3.3 million for the year ended December 31, 2016, due primarily to growth in the loan portfolio.
The allowance for loan losses at December 31, 2017 represented 1.22% of loans outstanding, compared to
1.23% at December 31, 2016.
The following table presents a summary of the activity in the allowance for loan losses for the years ended
December 31, 2018, 2017, and 2016:
(dollars in thousands)
Balance at Beginning of Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 16,502
3,575
Provision for Loan Losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(421)
Charge-offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recoveries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
375
Balance at End of Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 20,031
2018
Year Ended
December 31,
2017
$ 12,333
4,175
(177)
171
$ 16,502
2016
$ 10,052
3,250
(1,114)
145
$ 12,333
Noninterest Income
2018 Compared to 2017
Noninterest income was $2.5 million for the years ended December 31, 2018 and 2017, an increase of $7,000.
The marginal increase was largely due to increased fees related to customer deposit accounts as a result of the overall
increase in the number of our deposit clients, increased fees earned for letters of credit due to increased volume, and a
decrease in losses on sales of securities. This activity was offset by an increased loss on sales of foreclosed assets.
2017 Compared to 2016
Noninterest income was $2.5 million and $2.6 million for the years ended December 31, 2017 and 2016, a
decrease of $31,000. The marginal decrease was due to the company realizing a net loss of $250,000 on sales of
investment securities in 2017 compared to a net gain of $830,000 in 2016. This was offset in part by increased gains on
the sale of foreclosed assets of $386,000 and increased letter of credit fees of $230,000. Increased fees related to
customer deposit accounts were due to an overall increase in the number of our deposit clients.
54
The following table presents the major components of noninterest income for the year ended December, 2018,
compared to the year ended December 31, 2017, and for the year ended December 31, 2017, compared to the year ended
December 31, 2016:
(dollars in thousands)
Noninterest Income:
Year Ended
December 31,
2018
2017
Increase/
(Decrease)
Year Ended
December 31,
2017
2016
Increase/
(Decrease)
Customer Service Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 745 $ 660 $
Net Gain (Loss) on Sales of Securities . . . . . . . . . . . . . .
Net Gain (Loss) on Sales of Foreclosed Assets . . . . . . .
Letter of Credit Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Debit Card Interchange Fees . . . . . . . . . . . . . . . . . . . . . .
Other Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(250)
356
1,072
390
308
(125)
(225)
1,296
391
461
Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,543 $ 2,536 $
Noninterest Expense
2018 Compared to 2017
85 $
660 $
(250)
356
1,072
390
308
125
(581)
224
1
153
490 $
830
(30)
842
265
170
170
(1,080)
386
230
125
138
(31)
7 $ 2,536 $ 2,567 $
Noninterest expense totaled $31.6 million for the year ended December 31, 2018, a $6.1 million, or 23.8%
increase from $25.5 million for the year ended December 31, 2017. The increase was primarily driven by a $4.6 million
increase in salaries and employee benefits as the result of increased staff to meet the needs of the Company’s growth and
merit increases, a $1.4 million increase in amortization of tax credit investments, a $261,000 increase in information
technology and telecommunication expenses to support the Company’s growing infrastructure, and a $359,000 increase
in marketing expenses to increase brand recognition in its market area. The increases were partially offset by a decrease
of $1.1 million in professional and consulting fees due to higher expenses incurred during 2017 for preparation of the
Company’s initial public offering, in comparison to 2018.
Full-time equivalent employees increased from 114 as of December 31, 2017, to 140 as of December 31, 2018.
The increase includes key strategic hires, particularly in deposit gathering roles, as the Company continues to capitalize
on M&A disruption in its market area.
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 46.5% for the year ended December 31, 2018, a marginal increase over 44.4% for the
year ended December 31, 2017. The amortization of tax credit investments elevated the level of operating expenses in
both years, and 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 generally consistent at 41.7% for the year ended
December 31, 2018, compared to 41.1% for the year ended December 31, 2017.
2017 Compared to 2016
Noninterest expense totaled $25.5 million for the year ended December 31, 2017, a $5.3 million, or 26.4%,
increase from $20.2 million for the year ended December 31, 2016. The increase was primarily driven by a $2.0 million
increase in salaries and employee benefits as the result of merit increases and increased staff to meet the needs of the
55
Company’s growth, a $1.3 million increase in professional and consulting expenses incurred in preparation of the
Company’s IPO, and a $1.9 million expense related to the amortization of tax credit investments.
Full-time equivalent employees increased from 97 as of December 31, 2016, to 114 as of December 31, 2017.
The increase in staffing was due to the Company’s growing infrastructure, particularly in areas to support preparing to
become and operate as a publicly traded company.
Efficiency Ratio. The efficiency ratio was 44.4% for the year ended December 31, 2017, a marginal decrease
over 45.8% for the year ended December 31, 2016, despite the amortization of tax credit investments elevating the level
of operating expenses in 2017. The adjusted efficiency ratio, which excludes the impact of the amortization of tax credit
investments, decreased more meaningfully to 41.1% for the year ended December 31, 2017, compared to 45.8% for the
year ended December 31, 2016, due primarily to favorable operating leverage.
The following table presents the major components of noninterest expense for the year ended December 31,
2018, compared to the year ended December 31, 2017, and the year ended December 31, 2017, compared to the year
ended December 31, 2016:
(dollars in thousands)
Noninterest Expense:
Year Ended
December 31,
2017
2018
Increase/
(Decrease) 2017
Year Ended
December 31,
2016
Increase/
(Decrease)
Salaries and Employee Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 18,620 $ 14,051 $
Occupancy and Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FDIC Insurance Assessment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Data Processing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Professional and Consulting Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Information Technology and Telecommunications . . . . . . . . . . . . . . . .
Marketing and Advertising . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible Asset Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of Tax Credit Investments . . . . . . . . . . . . . . . . . . . . . . . .
Other Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,192
770
592
2,198
671
983
—
191
1,916
1,932
2,351
915
470
1,125
932
1,342
—
191
3,293
2,323
4,569 $ 14,051 $ 12,087 $
159
145
(122)
(1,073)
261
359
—
—
1,377
391
2,192
770
592
2,198
452
983
—
191
1,916
2,151
1,821
838
667
904
394
864
323
105
—
2,165
Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 31,562 $ 25,496 $
6,066 $ 25,496 $ 20,168 $
1,964
371
(68)
(75)
1,294
58
119
(323)
86
1,916
(14)
5,328
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. At the same time, management seeks to contain costs
whenever prudent, which is evident in the stable nature of the efficiency ratio.
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. Our 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.
In both periods, comparability is impacted by the enactment of the Tax Cuts and Jobs Act on December 22,
2017. The legislation reduced the federal corporate tax rate from 35% in 2017 and periods prior to 21% starting in 2018
and required the Company to charge a one-time revaluation of the deferred tax asset of $2.0 million to the provision for
income taxes.
2018 Compared to 2017
Income tax expense was $5.2 million for the year ended December 31, 2018, compared to $10.1 million for the
year ended December 31, 2017. The effective combined federal and state income tax rate for the year ended
December 31, 2018 was 16.3%, compared to 37.5% for the year ended December 31, 2017. The lower effective
combined rate was primarily due to the recognition of $3.8 million of tax credit investments and reduction in the federal
corporate tax rate.
56
The recognition of tax credit investments significantly impacts the Company’s effective tax rate. Excluding the
impact of tax credit investments, the effective combined federal and state income tax rate for the year ended
December 31, 2018 was 25.5%.
2017 Compared to 2016
Income tax expense was $10.1 million for the year ended December 31, 2017, compared to $8.1 million for the
year ended December 31, 2016. The increase in tax expenses was due to the increase of taxable earnings and a $2.0
million expense related to the revaluation of the deferred tax asset in 2017, offset in part by a historic tax credit benefit
of $1.6 million. The effective tax rate for the years ended December 31, 2017 and 2016 was 37.5% and 37.9%,
respectively.
Financial Condition
Overview
Total assets at December 31, 2018 were $1.97 billion, an increase of $357.1 million, or 22.1%, from
December 31, 2017. Total gross loans increased $317.8 million, or 23.6%, from December 31, 2017. Securities available
for sale were $253.4 million at December 31, 2018, an increase of $23.4 million, or 10.4%, from December 31, 2017.
Total liabilities at December 31, 2018 were $1.75 billion, an increase of $273.3 million, or 18.5%, from
December 31, 2017. Total deposits increased $221.6 million, or 16.5%, from December 31, 2017. Total borrowings were
$181.6 million, an increase of $49.1 million, or 37.1%, from December 31, 2017.
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 assure 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 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 $253.4 million at December 31, 2018, compared to $229.5 million at
December 31, 2017, an increase of $23.9 million or 10.4%. At December 31, 2018, municipal securities represented
46.6% of the investment securities portfolio, government agency mortgage-backed securities represented 18.0% of the
portfolio, SBA securities represented 19.4% of the portfolio, corporate securities represented 8.3% of the portfolio, U.S.
treasury securities represented 7.1% of the portfolio, and other mortgage-backed securities represented 0.6% of the
57
portfolio. The following table presents the amortized cost and fair value of securities available for sale, by type, at
December 31, 2018 and 2017.
Amortized
December 31, 2018
Fair
Value
Cost
December 31, 2017
Fair
Value
Amortized
Cost
U.S. Treasury Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 17,862 $ 17,897 $
SBA Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage-Backed Securities Issued or Guaranteed by U.S.
49,054
49,876
— $
45,368
—
45,383
Agencies (MBS):
Residential Pass-Through:
Guaranteed by GNMA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6,940
Issued by FNMA and FHLMC . . . . . . . . . . . . . . . . . . . . . . . . . . .
11,272
Other Residential Mortgage-Backed Securities . . . . . . . . . . . . . . . .
28,834
Commercial Mortgage-Backed Securities . . . . . . . . . . . . . . . . . . . .
11,748
All Other Commercial MBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,887
Total MBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
60,681
Municipal Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
118,320
5,107
Corporate Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 255,715 $ 253,378 $ 228,149 $ 229,491
7,080
11,340
29,516
12,121
1,888
61,945
115,784
5,052
6,137
314
24,539
14,736
1,450
47,176
118,133
21,118
6,357
314
25,252
15,443
1,450
48,816
117,991
21,170
The following tables present the fair value of securities as of December 31, 2018 and December 31, 2017 by
their stated maturities, as well as the fully tax-equivalent yields for each maturity range.
Maturity as of December 31, 2018
Due in One Year
or Less
More Than One
Year to Five Years
More Than Five
Years to Ten Years
Due After Ten Years
Fair
Value
Weighted
Average
Yield
Fair
Value
Weighted
Average
Yield
Fair
Value
Weighted
Average
Yield
Fair
Value
Weighted
Average
Yield
U.S. Treasury Securities . $ 9,940
SBA Securities . . . . . . . . .
—
Mortgage-Backed
2.36 % $ 7,957
901
—
2.75 % $
3.66
—
15,961
— % $
3.12
—
32,192
— %
3.34
Securities Issued or
Guaranteed by U.S.
Agencies (MBS):
Residential
Pass-Through:
Guaranteed by
GNMA . . . . . . . . . . .
—
—
—
—
—
—
6,137
2.53
Issued by FNMA
and FHLMC . . . . . .
—
—
—
—
314
2.82
—
—
Other Residential
Mortgage-Backed
Securities . . . . . . . . . .
Commercial
Mortgage-Backed
Securities . . . . . . . . . .
All Other Commercial
109
0.91
43
2.84
309
2.28
24,078
2.81
—
—
2,525
1.72
6,825
2.61
5,386
2.84
—
MBS . . . . . . . . . . . . . . . .
109
Total MBS . . . . . . . . .
704
Municipal Securities . . . .
Corporate Securities . . . .
—
Total . . . . . . . . . . . . . . . . . . $ 10,753
—
0.91
3.66
—
—
2,568
9,401
—
2.43 % $ 20,827
—
1.74
3.64
—
—
7,448
30,403
21,118
3.07 % $ 74,930
1,450
—
37,051
2.61
77,625
4.18
5.26
—
4.10 % $ 146,868
3.52
2.80
4.00
—
3.55 %
58
Maturity as of December 31, 2017
Due in One Year
or Less
More Than One
Year to Five Years
More Than Five
Years to Ten Years
Due After Ten Years
Fair
Value
Weighted
Average
Yield
Fair
Value
Weighted
Average
Yield
Fair
Value
Weighted
Average
Yield
Fair
Value
Weighted
Average
Yield
—
— % $
—
— % $ 11,132
2.29 % $ 34,251
2.24 %
U.S. Treasury Securities
SBA Securities . . . . . . . . . . $
Mortgage-Backed
Securities Issued or
Guaranteed by U.S.
Agencies (MBS):
Residential
Pass-Through:
Guaranteed by
GNMA . . . . . . . . . . . .
—
—
—
—
—
—
6,940
2.27
Issued by FNMA and
GHLMC . . . . . . . . . . .
—
—
—
—
678
2.16
10,594
1.38
Other Residential
Mortgage-Backed
Securities . . . . . . . . . . .
Commercial
Mortgage-Backed
Securities . . . . . . . . . . .
All Other Commercial
—
—
838
1.69
448
2.60
27,548
2.36
—
—
2,593
1.74
5,526
2.34
3,629
2.75
MBS . . . . . . . . . . . . . . . . .
Total MBS . . . . . . . . . .
—
—
Municipal Securities . . . . . 2,008
Corporate Securities . . . . .
—
Total . . . . . . . . . . . . . . . . . . . $ 2,008
—
—
3.07
—
—
3,431
9,513
—
3.07 % $ 12,944
—
1.73
3.93
—
—
6,652
21,937
5,107
3.34 % $ 44,828
1,887
—
50,598
2.34
84,862
4.96
5.16
—
3.93 % $ 169,711
3.52
2.21
4.70
—
3.46 %
Loan Portfolio
The Company focuses on lending to borrowers located or investing in the Twin Cities MSA across a diverse
range of industries and property types. The Company lends primarily to commercial customers, consisting of loans
secured by nonfarm, nonresidential properties, loans secured by multifamily residential properties, construction loans,
land development loans, and commercial and industrial loans. 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 comprehensive 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, CRE exposure limits, portfolio monitoring tools,
management information systems, market reports, underwriting standards, a credit risk review function, and periodic
stress testing to evaluate potential credit risk and the subsequent impact on capital and earnings.
Total gross loans increased $317.8 million, or 23.6%, to $1.66 billion at December 31, 2018, compared to
$1.35 billion at December 31, 2017. The multifamily, construction and land development, and CRE nonowner occupied
categories contributed most significantly to the $317.8 million growth. As of December 31, 2018, multifamily loans
increased $90.1 million, or 28.3%, construction and land development loans increased $79.5 million, or 60.8%, and
nonowner occupied CRE loans increased $75.6, or 18.2%, when compared to December 31, 2017.
59
The following table details the dollar composition and percentage composition of the loan portfolio by
category, at the dates indicated:
(dollars in thousands)
December 31, 2018
Amount
Percent
December 31, 2017
Amount
Percent
Commercial . . . . . . . . . $ 260,833
Construction and Land
15.7 % $ 217,753
16.2 % $
December 31, 2016
Amount
132,592
Percent
December 31, 2015
Amount
Percent
December 31, 2014
Amount
Percent
13.2 % $ 103,905
13.0 % $ 64,143
10.7 %
Development . . . . . .
210,041
12.6
130,586
9.7
106,070
10.6
116,314
14.6
90,195
15.1
Real Estate Mortgage:
1 - 4 Family
Mortgage . . . . . .
Multifamily . . . . . .
CRE Owner
226,773
407,934
13.6
24.5
195,707
317,872
14.5
23.6
178,815
205,250
17.9
20.5
143,232
168,458
17.9
21.1
141,601
143,912
23.7
24.0
Occupied . . . . . . .
64,458
3.9
65,909
4.9
62,347
6.2
48,917
6.1
31,734
5.3
CRE Nonowner
Occupied . . . . . . .
490,632
29.5
415,034
30.8
311,835
31.2
215,995
27.0
123,399
20.6
Total Real Estate
Mortgage Loans . . . . 1,189,797
4,260
Consumer and Other . . .
71.5
0.2
994,522
4,252
73.8
0.3
758,247
3,830
75.8
0.4
576,602
2,676
72.1
0.3
440,646
3,563
73.6
0.6
Total Loans, Gross . 1,664,931 100.0 % 1,347,113 100.0 % 1,000,739 100.0 % 799,497 100.0 % 598,547 100.0 %
Allowance for Loan
Losses . . . . . . . . . . .
(20,031)
(16,502)
(12,333)
(10,052)
(9,489)
Net Deferred Loan
Fees . . . . . . . . . . . . .
(4,515)
Total Loans, Net . . . . . . . $ 1,640,385
(4,104)
$ 1,326,507
(3,266)
985,140
$
(2,686)
$ 786,759
(1,762)
$ 587,296
The Company’s primary focus has been on real estate mortgage lending, which constituted 71.5% of the
portfolio as of December 31, 2018. 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 December 31, 2018, CRE loans totaled $1.11 billion, consisting of $490.6 million of loans secured by
nonowner occupied CRE, $407.9 million of loans secured by multifamily residential properties and $210.0 million of
construction and land development loans. CRE loans represented 66.6% of the total gross loan portfolio and 480.2% of
the Bank’s total risk-based capital at December 31, 2018.
The following table details time to contractual maturity and sensitivity to interest rate changes for the loan
portfolio at December 31, 2018:
Due in One Year More Than One
As of December 31, 2018
(dollars in thousands)
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Construction and Land Development . . . . . . . . . . . . . . . . . . . . . . . . . .
Real Estate Mortgage:
1 - 4 Family Mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Multifamily . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CRE Owner Occupied . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CRE Nonowner Occupied . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Real Estate Mortgage Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer and Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Loans, Gross . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Interest Rate Sensitivity:
Fixed Interest Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Floating or Adjustable Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Loans, Gross . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
60
or Less
127,439 $
155,117
Year to Five Years After Five Years
40,705
21,632
92,689 $
33,292
43,795
41,773
7,948
63,266
156,782
1,207
440,545 $
154,864
147,129
25,287
254,842
582,122
2,360
710,463 $
28,114
219,032
31,223
172,524
450,893
693
513,923
154,318 $
286,227
440,545 $
537,119 $
173,344
710,463 $
162,901
351,022
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 insured 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
“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 December 31, 2018. The Company had no
assets classified as doubtful or loss.
(dollars in thousands)
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Construction and Land Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real Estate Mortgage:
1 - 4 Family Mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CRE Owner Occupied . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CRE Nonowner Occupied . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Real Estate Mortgage Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer and Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Risk Category
Watch
Substandard
Total
600 $
2,669
8 $
198
608
2,867
3,195
—
3,194
6,389
—
9,658 $
1,685
2,235
—
3,920
58
4,184 $
4,880
2,235
3,194
10,309
58
13,842
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. Nonaccrual loans totaled
$581,000 as of December 31, 2018 and $1.1 million as of December 31, 2017, a decrease of $558,000. There were no
loans 90 days past due and still accruing as of December 31, 2018 and 2017. There were no foreclosed assets as of
December 31, 2018 and $581,000 as of December 31, 2017, a decrease of $581,000.
61
The following table summarizes nonperforming assets, by category, at the dates indicated:
(dollars in thousands)
Nonaccrual Loans:
2018
2017
2016
2015
2014
December 31,
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Construction and Land Development . . . . . . . . . . . . . . . . . . .
Real Estate Mortgage:
8
198
1 - 4 Family Mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CRE Owner Occupied . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CRE Nonowner Occupied . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Real Estate Mortgage Loans . . . . . . . . . . . . . . . . . . . . .
Consumer and Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
317
—
—
317
58
Total Nonaccrual Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 581
Total Nonperforming Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 581
Plus: Foreclosed Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Total Nonperforming Assets (1) . . . . . . . . . . . . . . . . . . . . . . . . . $ 581
Total Restructured Accruing Loans . . . . . . . . . . . . . . . . . . . . . .
181
Total Nonperforming Assets and Restructured Accruing
$
9
583
$
15
604
$
98
615
$
148
626
472
—
—
472
75
$ 1,139
$ 1,139
581
$ 1,720
2,178
805
—
801
1,606
98
$ 2,323
$ 2,323
4,183
$ 6,506
3,286
1,029
596
—
1,625
—
$ 2,338
$ 2,338
726
$ 3,064
4,270
149
—
—
149
—
923
$
$
923
2,944
$ 3,867
6,153
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 762
$ 3,898
$ 9,792
$ 7,334
$ 10,020
Nonaccrual Loans to Total Loans . . . . . . . . . . . . . . . . . . . . . . .
Nonperforming Loans to Total Loans . . . . . . . . . . . . . . . . . . . .
Nonperforming Assets to Total Loans Plus Foreclosed
0.03 % 0.08 % 0.23 %
0.03
0.08
0.23
0.29 %
0.29
0.15 %
0.15
Assets (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.03
0.13
0.65
0.38
0.64
Nonperforming Assets and Restructured Accruing Loans to
Total Loans Plus Foreclosed Assets . . . . . . . . . . . . . . . . . . . .
0.05
0.29
0.97
0.92
1.67
(1) Nonperforming assets are defined as nonaccrual loans and loans greater than 90 days past due still accruing plus foreclosed assets. There were no
loans greater than 90 days past due still accruing for any period shown.
The balance of nonperforming assets can fluctuate due to changes in economic conditions. The Company has
established a policy to discontinue accruing interest on a loan (that is, place the loan on nonaccrual status) after it has
become 90 days delinquent as to payment of principal or interest, unless the loan is considered to be well-collateralized
and is actively in the process of collection. In addition, a loan will be placed on nonaccrual status before it becomes 90
days delinquent unless management believes that the collection of interest is expected. Interest previously accrued but
uncollected on such loans is reversed and charged against current income when the receivable is determined to be
uncollectible. If management believes that a loan will not be collected in full, an increase to the allowance for loan losses
is recorded to reflect management’s estimate of any potential exposure or loss. Generally, payments received on
nonaccrual loans are applied directly to principal. 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,
62
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 December 31, 2018, the allowance for loan losses was $20.0 million, an increase of $3.5 million from
$16.5 million at December 31, 2017. Net charge-offs totaled $46,000 during the year ended December 31, 2018 and
$6,000 during the year ended December 31, 2017. The allowance for loan losses as a percentage of total loans was
1.20% at December 31, 2018 and 1.22% at December 31, 2017.
The following is a summary of the activity in the allowance for loan loss reserve for the periods indicated:
(dollars in thousands)
Balance, Beginning of Period . . . . . . . . . . . . $
Charge-offs:
2018
16,502
$
Commercial . . . . . . . . . . . . . . . . . . . . . . . . .
Construction and Land Development . . . .
Real Estate Mortgage:
1 - 4 Family Mortgage . . . . . . . . . . . . . . .
CRE Owner Occupied . . . . . . . . . . . . . . .
CRE Nonowner Occupied . . . . . . . . . . . .
Total Real Estate Mortgage Loans . . . . . .
Consumer and Other . . . . . . . . . . . . . . . . . .
Total Charge-offs . . . . . . . . . . . . . . . . . . . . .
Recoveries:
Commercial . . . . . . . . . . . . . . . . . . . . . . . . .
Construction and Land Development . . . .
Real Estate Mortgage:
10
358
21
—
—
21
32
421
25
285
As of and for the year ended December 31,
2015
$ 9,489
2016
10,052
2017
12,333
$
1
—
—
—
111
111
65
177
5
24
107
248
1
123
613
737
22
1,114
101
8
34
348
662
—
—
662
—
1,044
1
29
2014
$ 8,361
42
249
190
5
113
308
—
599
68
29
1 - 4 Family Mortgage . . . . . . . . . . . . . . .
Multifamily . . . . . . . . . . . . . . . . . . . . . . . .
CRE Owner Occupied . . . . . . . . . . . . . . .
Total Real Estate Mortgage Loans . . . . . .
Consumer and Other . . . . . . . . . . . . . . . . . .
Total Recoveries . . . . . . . . . . . . . . . . . . . . . .
Net Charge-offs . . . . . . . . . . . . . . . . . . . . . . .
Provision for Loan Losses . . . . . . . . . . . . . .
Balance at End of Period . . . . . . . . . . . . . . . $
Gross Loans, End of Period . . . . . . . . . . . . .
Average Loans . . . . . . . . . . . . . . . . . . . . . . . .
Net Charge-offs (Recoveries) to
59
—
—
59
6
375
46
3,575
20,031
1,664,931
1,491,166
Average Loans . . . . . . . . . . . . . . . . . . . . . .
Allowance to Total Gross Loans . . . . . . . . .
138
—
—
138
4
171
6
4,175
$
16,502
1,347,113
1,177,491
32
—
—
32
4
145
969
3,250
$
12,333
1,000,739
896,915
29
5
28
62
15
107
937
1,500
$ 10,052
799,497
684,498
24
—
91
115
15
227
372
1,500
$ 9,489
598,547
540,894
0.00 %
1.20 %
0.00 %
1.22 %
0.11 %
1.23 %
0.14 %
1.26 %
0.07 %
1.59 %
63
The following table presents a summary of the allocation of the allowance for loan losses by loan portfolio
segment for the periods indicated:
(dollars in thousands)
Commercial . . . . . . . . . . . . . $ 2,898
Construction and Land
December 31,
2018
December 31,
2016
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
11.5 %
December 31,
2014
December 31,
2015
December 31,
2017
10.7 % $ 1,349
14.7 % $ 1,315
14.5 % $ 2,435
13.4 % $ 1,093
Development . . . . . . . . . .
2,451
12.2
1,892
11.5
1,379
11.2
1,708
17.0
1,841
19.4
Real Estate Mortgage:
1 - 4 Family Mortgage . . . .
Multifamily . . . . . . . . . . . .
CRE Owner Occupied . . . .
CRE Nonowner Occupied .
Total Real Estate Mortgage
2,597
4,644
808
5,872
13.0
23.2
4.0
29.3
2,317
3,170
956
5,087
Loans . . . . . . . . . . . . . . . .
Consumer and Other . . . . . . .
Unallocated . . . . . . . . . . . . .
13,921
65
696
69.5
0.3
3.5
11,530
60
585
Total Allowance for Loan
14.0
19.2
5.8
30.8
69.8
0.4
3.6
2,410
1,568
1,160
3,323
8,461
78
1,100
19.5
12.7
9.4
27.0
68.6
0.6
8.9
1,765
871
1,019
2,452
17.6
8.7
10.1
24.4
2,168
910
717
1,628
6,107
36
852
60.8
0.3
8.5
5,423
64
1,068
22.8
9.6
7.6
17.2
57.1
0.7
11.2
Losses . . . . . . . . . . . . . . . . . $ 20,031
100.0 % $ 16,502
100.0 % $ 12,333
100.0 % $ 10,052
100.0 % $ 9,489
100.0 %
Goodwill and Other Intangible Assets
Goodwill was $2.6 million at December 31, 2018 and December 31, 2017. Goodwill represents the excess of
the consideration paid over the fair value of the net assets acquired, which originated from the acquisition of First
National Bank of the Lakes in May of 2016. Goodwill is not amortized but is subject to, at a minimum, an annual test for
impairment. Other intangible assets consist of core deposit relationships and favorable lease term intangibles. Total other
intangible assets at December 31, 2018 and December 31, 2017 were $1.0 million and $1.2 million, respectively. Other
intangible assets are amortized over their estimated useful life.
Deposits
The principal sources of funds for the Company are core 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:
(dollars in thousands)
Noninterest Bearing
Transaction Deposits . $ 369,203
Interest Bearing
December 31,
2018
December 31,
2017
December 31,
2016
December 31,
2015
December 31,
2014
Amount
Percent Amount
Percent Amount
Percent Amount Percent Amount Percent
23.6 % $ 292,539
21.9 % $ 238,062
23.3 % $ 169,403
22.2 % $ 109,491
18.2 %
Transaction Deposits .
179,567
11.5
177,292
13.2
132,800
13.0
130,496
17.1
119,083
19.8
Savings and Money
Market Deposits . . . .
Time Deposits . . . . . . . .
Brokered Deposits . . . . .
402,639
318,356
291,169
Total Deposits . . . . . $ 1,560,934
369,942
25.8
292,096
20.4
18.7
207,481
100.0 % $ 1,339,350
239,084
27.6
273,229
21.8
15.5
140,333
100.0 % $ 1,023,508
152,848
23.4
192,620
26.6
13.7
116,515
100.0 % $ 761,882
106,779
20.1
182,504
25.3
15.3
83,515
100.0 % $ 601,372
17.8
30.3
13.9
100.0 %
Total deposits at December 31, 2018 were $1.56 billion, an increase of $221.6 million, or 16.5%, compared to
total deposits of $1.34 billion at December 31, 2017. Noninterest bearing deposits were $369.2 million at
December 31, 2018, compared to $292.5 million at December 31, 2017. Noninterest bearing deposits comprised 23.6%
of total deposits at December 31, 2018, compared to 21.9% at December 31, 2017.
The Company relies on increasing the deposit base to fund loan 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
64
of an extensive branch network. The Company’s strategy is to offset the higher cost of funding with a lower level of
operating expense and firm pricing discipline for loan products. When appropriate, the Company utilizes alternative
funding sources such as brokered deposits. At December 31, 2018, total brokered deposits were $291.2 million or 18.7%
of total deposits.
The following table presents the average balance and average rate paid on each of the following deposit
categories for the years ended December 31, 2018, 2017, and 2016:
(dollars in thousands)
Noninterest Bearing Transaction Deposits . . . $ 330,898
177,335
Interest Bearing Transaction Deposits . . . . . . .
381,318
Savings and Money Market Deposits . . . . . . .
196,235
Time Deposits < $250,000 . . . . . . . . . . . . . . . .
103,786
Time Deposits > $250,000 . . . . . . . . . . . . . . . .
232,022
Brokered Deposits . . . . . . . . . . . . . . . . . . . . . . .
Total Deposits . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,421,594
As of and for the
Year Ended
December 31, 2018
Average
Balance
Average
Rate
As of and for the
Year Ended
December 31, 2016
Average
Balance
Average
Rate
Average
Rate
— % $
As of and for the
Year Ended
December 31, 2017
Average
Balance
299,232
161,454
0.36
284,641
1.23
181,871
1.93
104,969
1.87
185,144
2.12
1.12 % $ 1,217,311
— %$ 214,490
133,130
0.24
199,525
0.78
60,667
1.62
175,974
1.35
125,414
1.49
0.80 %$ 909,200
— %
0.30
0.71
1.61
1.43
1.31
0.76 %
The following table shows time deposits, including brokered time deposits, of $100,000 or more, by time
remaining until maturity.
(dollars in thousands)
Three Months or Less . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Over Three Months through Six Months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Over Six Months through 12 Months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Over 12 Months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
December 31,
2018
30,522
19,480
52,675
408,402
511,079
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:
(dollars in thousands)
Outstanding at Period-End . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 18,000
29,671
Average Amount Outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maximum Amount Outstanding at any Month-End . . . . . . . . . . . . . . . . . . . . . .
90,000
Weighted Average Interest Rate:
2018
As of and for the year ended December 31,
2017
$ 23,000
15,247
39,000
2016
$ 44,000
8,852
44,000
During Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
End of Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2.15 %
2.63 %
1.11 %
1.63 %
0.63 %
0.81 %
65
Other Borrowings
At December 31, 2018, other borrowings outstanding consisted of FHLB advances of $124.0 million and notes
payable of $15.0 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 $122.1
million and $180.9 million at December 31, 2018 and December 31, 2017, respectively.
Additionally, the Company has borrowing capacity from other sources. As of December 31, 2018, 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 $114.1 million and $37.5 million at
December 31, 2018 and December 31, 2017, respectively. As of December 31, 2018 and December 31, 2017, the
Company had no outstanding advances.
The Company has entered into 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 one-month LIBOR.
Subordinated Debentures
On July 12, 2017, the Company issued $25.0 million of subordinated debentures at an initial fixed interest rate
of 5.875% which is payable semi-annually. Beginning July 15, 2022, the interest rate converts to a variable interest rate
equal to the three-month LIBOR plus 3.88%. The subordinated debentures mature on July 15, 2027. The subordinated
debentures, net of issuance costs, were $24.6 million at December 31, 2018, compared to $24.5 million at December 31,
2017. The subordinated debentures qualify as Tier 2 regulatory capital treatment for the first five years, under applicable
regulatory guidelines.
Contractual Obligations
The following table contains supplemental information regarding total contractual obligations at
December 31, 2018:
Within
One to
Three to
Three Years Five Years Five Years
After
One Year
(dollars in thousands)
Deposits Without a Stated Maturity . . . . . . . . . . . . . . . . $ 978,399 $
Time Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FHLB Advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subordinated Debentures . . . . . . . . . . . . . . . . . . . . . . . .
Commitment to Fund Tax Credit Investments . . . . . . .
Operating Lease Obligations . . . . . . . . . . . . . . . . . . . . .
— $ 978,399
582,535
—
15,000
—
124,000
15,000
25,000
25,000
3,226
—
4,524
1,454
Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,131,142 $ 344,034 $ 216,054 $ 41,454 $ 1,732,684
309,647
13,000
20,000
—
—
1,387
146,408
—
69,000
—
—
646
126,480
2,000
20,000
—
3,226
1,037
— $
— $
Total
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 will construct
the core and shell of a new headquarters building for the Bank in St. Louis Park, Minnesota, and the Bank will pay the
Contractor a contract price consisting of the cost of work plus a fee equal to 3.75% of the cost of work, subject to a
guaranteed maximum price of $23.0 million, with anticipated construction to be completed in 2020. As of December 31,
2018, $2.0 million has been paid under this Construction Contract.
Operating lease obligations are in place for facilities and land on which banking branches are located. See
Note 6 of the Company’s Consolidated Financial Statements included as part of this report for additional information.
66
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 December 31, 2018 was $221.0 million, an increase of $83.8 million, or 61.1%, over
shareholders’ equity of $137.2 million at December 31, 2017, primarily due to $58.9 million of net proceeds from the
issuance of common stock in the Company’s initial public offering and $26.9 million of net income, offset by a
$2.7 million decrease in accumulated other comprehensive income. The decrease in accumulated other comprehensive
income primarily resulted from interest rate fluctuations between periods.
The Company and the Bank are subject to various regulatory capital requirements administered by federal
banking regulators. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional
discretionary actions by federal banking regulators that, if undertaken, could have a direct material effect on the
Company’s and Bank’s business.
Under applicable regulatory capital rules, the Company and Bank must meet specific capital guidelines that
involve quantitative measures of their assets, liabilities and certain off-balance sheet items as calculated under regulatory
accounting practices. The Bank must also meet certain specific capital guidelines under the prompt corrective action
framework. The capital amounts and classification are subject to qualitative judgments by the federal banking regulators
about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital
adequacy require the Company and the Bank to maintain minimum amounts and ratios of common equity Tier 1 capital,
Tier 1 capital and total capital to risk-weighted assets and of Tier 1 capital to average consolidated assets (referred to as
the “leverage ratio”), as defined under the applicable regulatory capital rules.
Management believes the Company and the Bank met all capital adequacy requirements to which they were
subject as of December 31, 2018. 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.
Actual
For Capital Adequacy
Purposes
To be Well Capitalized
Under Prompt Corrective
Action Regulations
December 31, 2018
Amount
Ratio Amount
Ratio
Amount
Ratio
(dollars in thousands)
Company (Consolidated):
Total Risk-Based Capital . . . . . . . . . . . . . . . . $ 263,909
218,888
Tier 1 Risk-Based Capital . . . . . . . . . . . . . . .
218,888
Common Equity Tier 1 Capital . . . . . . . . . . .
218,888
Tier 1 Leverage Ratio . . . . . . . . . . . . . . . . . . .
14.55 % $ 145,111
108,833
12.07
81,625
12.07
77,971
11.23
8.00 %
6.00
4.50
4.00
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
Bank:
Total Risk-Based Capital . . . . . . . . . . . . . . . . $ 230,865
210,474
Tier 1 Risk-Based Capital . . . . . . . . . . . . . . .
210,474
Common Equity Tier 1 Capital . . . . . . . . . . .
210,474
Tier 1 Leverage Ratio . . . . . . . . . . . . . . . . . . .
12.76 % $ 144,776
108,582
11.63
81,436
11.63
77,795
10.82
8.00 % $ 180,970
144,776
6.00
117,630
4.50
97,244
4.00
10.00 %
8.00
6.50
5.00
67
Actual
For Capital Adequacy
Purposes
To be Well Capitalized
Under Prompt Corrective
Action Regulations
December 31, 2017
Amount
Ratio Amount
Ratio
Amount
Ratio
(dollars in thousands)
Company (Consolidated):
Total Risk-Based Capital . . . . . . . . . . . . . . . . $ 173,848
132,459
Tier 1 Risk-Based Capital . . . . . . . . . . . . . . .
132,459
Common Equity Tier 1 Capital . . . . . . . . . . .
132,459
Leverage Ratio . . . . . . . . . . . . . . . . . . . . . . . .
12.46 % $ 111,638
83,729
62,797
63,264
9.49
9.49
8.38
8.00 %
6.00
4.50
4.00
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
Bank:
Total Risk-Based Capital . . . . . . . . . . . . . . . . $ 171,805
154,943
Tier 1 Risk-Based Capital . . . . . . . . . . . . . . .
154,943
Common Equity Tier 1 Capital . . . . . . . . . . .
154,943
Leverage Ratio . . . . . . . . . . . . . . . . . . . . . . . .
12.37 % $ 111,134
83,351
11.15
62,513
11.15
63,060
9.83
8.00 % $ 138,918
111,134
6.00
90,297
4.50
78,825
4.00
10.00 %
8.00
6.50
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 is added to the minimum requirements for capital adequacy purposes. The capital conservation
buffer is subject to a four year phase-in period that began on January 1, 2016, and will be fully phased-in on 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 will be subject to limitations on capital distributions, including
dividend payments, and certain discretionary bonus payments to executive officers. At December 31, 2018, the ratios for
the Company and the Bank were sufficient to meet the fully phased-in 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 December 31, 2018 and December 31, 2017:
December 31, 2018
Fixed
Variable
December 31, 2017
Fixed
Variable
(dollars in thousands)
Unfunded Commitments Under Lines of Credit . . . . . . . . . . . . . . . . . . . $ 58,611 $ 336,421 $ 112,555 $ 196,958
52,212
Letters of Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 92,510 $ 383,575 $ 124,889 $ 249,170
47,154
12,334
33,899
Commitments to extend credit beyond current fundings are agreements to lend to a customer as long as there is
no violation of any condition established in the contract. Such commitments generally have fixed expiration dates or
other termination clauses and may require payment of a fee. Since many of the commitments may expire without being
drawn upon, the total commitment amounts do not necessarily represent future cash requirements. We evaluate each
68
customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by us upon
extension of credit, is based on our management’s credit evaluation. Collateral held varies but may include accounts
receivable, inventory, property, plant and equipment, and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by us to guarantee the performance of a customer
to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including
commercial paper, bond financing, and similar transactions. Commercial letters of credit are issued specifically to
facilitate trade or commerce and are paid directly when the underlying transaction is consummated. The credit risk
involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.
Liquidity
Liquidity Management
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 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 regard 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
December 31, 2018, the Company had no borrowings outstanding through the AFX.
The following tables provide a summary of primary and secondary liquidity levels as of the dates indicated:
Primary Liquidity—On-Balance Sheet
December 31, 2018 December 31, 2017
Cash and Cash Equivalents . . . . . . . . . . . . . . . . . . . . . . $
Securities Available for Sale . . . . . . . . . . . . . . . . . . . . .
Less: Pledged Securities . . . . . . . . . . . . . . . . . . . . . . . . .
Total Primary Liquidity . . . . . . . . . . . . . . . . . . . . . . . . $
Ratio of Primary Liquidity to Total Deposits . . . . . . . .
(Dollars in thousands)
28,444 $
253,378
—
281,822 $
18.1 %
23,725
229,491
81,639
171,577
12.8 %
Secondary Liquidity—Off-Balance Sheet
Borrowing Capacity
December 31, 2018 December 31, 2017
Net Secured Borrowing Capacity with the FHLB . . . . $
Net Secured Borrowing Capacity with the Federal
(Dollars in thousands)
122,120 $
180,942
Reserve Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
114,051
37,530
Unsecured Borrowing Capacity with Correspondent
Lenders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Secondary Liquidity . . . . . . . . . . . . . . . . . . . . . . $
90,000
326,171 $
60,000
278,472
Ratio of Primary and Secondary Liquidity to Total
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
39.0 %
33.6 %
During the year ended December 31, 2018, primary liquidity increased $110.3 million due to a $23.9 million
increase in securities available for sale, a $4.7 million increase in cash and cash equivalents, and a $81.6 million
decrease in pledged securities, when compared to December 31, 2017. Secondary liquidity increased $47.7 million as of
69
December 31, 2018 when compared to December 31, 2017, due to a $76.5 million increase in the borrowing capacity on
the secured credit line with the Federal Reserve Bank and a $30.0 million increase in unsecured borrowing capacity with
correspondent lenders, offset by a $58.8 million decrease in the borrowing capacity on the secured borrowing line with
the FHLB.
In addition to primary liquidity, the Company generates liquidity from cash flows from the loan and securities
portfolios and from the large base of core 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
December 31, 2018, core deposits totaled approximately $1.16 billion and represented 74.2% 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 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 and transaction accounts. At December 31, 2017, brokered deposits totaled $207.5 million, consisting of
$183.4 million of brokered time deposits and $24.1 million of non-maturity brokered money market accounts. The
Company has increased the amount of brokered deposits in recent quarters because of the efficiency in obtaining such
deposits relative to comparable core deposit offerings, and the callable nature embedded in the structures, should rates
decline.
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 December 31, 2018 and 2017, the Company was in compliance with all established liquidity guidelines.
GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures
Some of the financial data included in this report are not measures of financial performance recognized by
GAAP. Management uses these non-GAAP financial measures in the analysis of performance:
•
•
•
•
‘‘Efficiency ratio’’ is defined as noninterest expense less the amortization of intangibles divided by our
operating revenue, which is equal to net interest income plus noninterest income excluding gains and losses
on sales of securities. In our judgment, the adjustments made to operating revenue allow investors and
analysts to better assess our operating expenses in relation to our core operating revenue by removing the
volatility that is associated with certain one-time items and other discrete items that are unrelated to our
core business.
‘‘Adjusted Efficiency ratio’’ is defined as the efficiency ratio adjusted to exclude the amortization of tax
credit investments from noninterest expense.
“Tangible common equity’’ is defined as shareholders’ equity reduced by goodwill and other intangible
assets. We believe that this measure is important to many investors in the marketplace who are interested in
changes from period to period in shareholders’ equity exclusive of changes in intangible assets. Goodwill
and other intangibles that were recorded in a purchase business combination have the effect of increasing
both equity and assets while not increasing our tangible equity or tangible assets.
‘‘Tangible common equity to tangible assets’’ is defined as the ratio of tangible common equity, as defined
above, divided by total assets reduced by goodwill and other intangible assets. We believe that this measure
is important to many investors in the market place who are interested in relative changes from period to
period in shareholders’ equity to total assets, each exclusive of changes in intangible assets. Goodwill and
other intangibles that were recorded in a purchase business combination have the effect of increasing both
equity and assets while not increasing our tangible equity or tangible assets.
70
•
‘‘Tangible book value per share’’ is defined as tangible shareholders’ equity divided by total common
voting and non-voting shares outstanding. We believe that this measure is important to many investors in
the marketplace who are interested in changes from period to period in book value per share exclusive of
changes in intangible assets. Goodwill and other intangibles that were recorded in a purchase business
combination have the effect of increasing book value while not increasing our tangible book value.
The Company believes these non-GAAP financial measures provide useful information to management and
investors that is supplementary to our financial condition, results of operations and cash flows computed in accordance
with GAAP; however, we acknowledge that our non-GAAP financial measures have a number of limitations. As such,
you should not view these disclosures as a substitute for results determined in accordance with GAAP, and they are not
necessarily comparable to non-GAAP financial measures that other companies use. The following reconciliation table
provides a more detailed analysis of these non-GAAP financial measures:
(cid:3)
71
(dollars in thousands, except share data)
2018
As of and for the year ended December 31,
2015
2016
2017
2014
Efficiency Ratio
Noninterest Expense . . . . . . . . . . . . . . . . . . . $
Less: Amortization of Intangible Assets . . .
Adjusted Noninterest Expense . . . . . . . . $
Net Interest Income . . . . . . . . . . . . . . . . . . . .
Noninterest Income . . . . . . . . . . . . . . . . . . . .
Less: (Gain) Loss on Sales of Securities . . .
Adjusted Operating Revenue . . . . . . . . . . $
Efficiency Ratio . . . . . . . . . . . . . . . . . . . .
Adjusted Efficiency Ratio
Noninterest Expense . . . . . . . . . . . . . . . . . . . $
Less: Amortization of Tax Credit
Investments . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Amortization of Intangible Assets . . .
Adjusted Noninterest Expense . . . . . . . . $
Net Interest Income . . . . . . . . . . . . . . . . . . . .
Noninterest Income . . . . . . . . . . . . . . . . . . . .
Less: (Gain) Loss on Sales of Securities . . .
Adjusted Operating Revenue . . . . . . . . . . $
Adjusted Efficiency Ratio . . . . . . . . . . . . .
$
$
31,562
(191)
31,371
64,738
2,543
125
67,406
$
$
25,496
(191)
25,305
54,173
2,536
250
56,959
$
46.5 %
$
44.4 %
20,168
(104)
20,064
42,118
2,567
(830)
43,855
$ 14,817
—
$ 14,817
32,695
1,872
(574)
$ 33,993
$ 11,983
—
$ 11,983
28,799
975
(270)
$ 29,504
45.8 %
43.6 %
40.6 %
31,562
$
25,496
$
20,168
$ 14,817
$ 11,983
(3,293)
(191)
28,078
64,738
2,543
125
67,406
$
$
(1,916)
(191)
23,389
54,173
2,536
250
56,959
$
41.7 %
$
41.1 %
—
(104)
20,064
42,118
2,567
(830)
43,855
45.8
—
—
$ 14,817
32,695
1,872
(574)
$ 33,993
43.6
—
—
$ 11,983
28,799
975
(270)
$ 29,504
40.6
Tangible Common Equity and
Tangible Common
Equity/Tangible Assets
Common Equity . . . . . . . . . . . . . . . . . . . . . . $
Less: Intangible Assets . . . . . . . . . . . . . . . . .
Tangible Common Equity . . . . . . . . . . . .
220,998
(3,678)
217,320
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . 1,973,741
(3,678)
Less: Intangible Assets . . . . . . . . . . . . . . . . .
Tangible Assets . . . . . . . . . . . . . . . . . . . . . $ 1,970,063
Tangible Common Equity/Tangible
$
137,162
(3,869)
133,293
1,616,612
(3,869)
$ 1,612,743
$
115,366
(4,060)
111,306
1,260,394
(4,060)
$ 1,256,334
$ 80,178
—
80,178
928,686
—
$ 928,686
$ 53,738
—
53,738
702,175
—
$ 702,175
Assets . . . . . . . . . . . . . . . . . . . . . . . . . . .
11.03 %
8.26 %
8.86 %
8.63 %
7.65 %
Tangible Book Value Per Share
Book Value Per Common Share . . . . . . . . . $
Less: Effects of Intangible Assets . . . . . . . .
7.34
(0.12)
$
5.56
(0.16)
$
4.69
(0.17)
$
4.05
—
$
3.36
—
Tangible Book Value Per Common
Share . . . . . . . . . . . . . . . . . . . . . . . . . . . $
7.22
$
5.40
$
Average Tangible Common Equity
Average Common Equity . . . . . . . . . . . . . . . $
Less: Effects of Average Intangible Assets .
Average Tangible Common Equity . . . . . $
194,083
(3,772)
190,311
$
$
128,123
(3,956)
124,167
$
$
4.52
—
—
102,588
(2,701)
99,887
$
4.05
—
—
$ 63,981
—
$ 63,981
$
3.36
—
—
$ 48,443
—
$ 48,443
Item 7A. 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
72
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 our net interest income in hypothetical rising and declining rate scenarios calculated as of
December 31, 2018 are presented in the table below. The projections assume immediate, parallel shifts downward of the
yield curve of 100 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 200, 300 and 400 basis points
does not provide us with meaningful results and thus is not presented.
Change (basis points) in Interest Rates
(12-Month Projection)
+400
+300
+200
+100
0
(cid:237)100
Forecasted Net Percentage Change
Interest Income
72,332
$
70,142
67,888
65,571
63,180
59,467
from Base
14.49 %
11.02
7.45
3.79
—
(5.88)
73
The table above indicates that as of December 31, 2018, in the event of an immediate and sustained 300 basis
point increase in interest rates, we would experience an 11.02% increase in net interest income. In the event of an
immediate 100 basis point decrease in interest rates, we would experience a 5.88% 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, our 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 our 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 our assets. Actual results could differ from
those projected if we grow assets and liabilities faster or slower than estimated, if we experience a net outflow of deposit
liabilities or if our mix of assets and liabilities otherwise changes. Actual results could also differ from those projected if
we experience substantially different repayment speeds in our loan portfolio than those assumed in the simulation model.
Finally, these simulation results do not contemplate all the actions that we may undertake in response to potential or
actual changes in interest rates, such as changes to our loan, investment, deposit, or funding strategies.
74
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Bridgewater Bancshares, Inc. and Subsidiaries
Bloomington, Minnesota
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Bridgewater Bancshares, Inc. and Subsidiaries (the
Company) as of December 31, 2018 and 2017, and the related consolidated statements of income, comprehensive income,
shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2018 and the
related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in
all material respects, the financial position of Bridgewater Bancshares, Inc. and Subsidiaries as of December 31, 2018 and
2017, and the results of their operations and their cash flows for each of the years in the three-year period ended
December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion
on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public
Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the
Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and
Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement,
whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting in accordance with the standards of the PCAOB. As part of our audits, we are required to
obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the
effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether
due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a
test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating
the accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
CliftonLarsonAllen LLP
Minneapolis, Minnesota
March 14, 2019
We have served as the Company’s auditor since 2005.
75
Bridgewater Bancshares, Inc. and Subsidiaries
Consolidated Balance Sheets
(dollars in thousands, except share data)
Cash and Cash Equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Bank-Owned Certificates of Deposit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities Available for Sale, at Fair Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans, Net of Allowance for Loan Losses of $20,031 at December 31, 2018 and $16,502 at
28,444 $
3,305
253,378
23,725
3,072
229,491
ASSETS
December 31, December 31,
2018
2017
December 31, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Home Loan Bank (FHLB) Stock, at Cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Premises and Equipment, Net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreclosed Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Intangible Assets, Net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,326,507
5,147
10,115
581
5,342
2,626
1,243
8,763
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,973,741 $ 1,616,612
1,640,385
7,614
13,074
—
6,589
2,626
1,052
17,274
LIABILITIES
Deposits:
LIABILITIES AND EQUITY
Noninterest Bearing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Interest Bearing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Funds Purchased . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FHLB Advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subordinated Debentures, Net of Issuance Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued Interest Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,191,731
1,560,934
18,000
15,000
124,000
24,630
1,806
8,373
1,752,743
292,539
1,046,811
1,339,350
23,000
17,000
68,000
24,527
1,408
6,165
1,479,450
369,203 $
Preferred Stock- $0.01 par value
Authorized 10,000,000; None Issued and Outstanding at December 31, 2018 and
SHAREHOLDERS' EQUITY
December 31, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
Common Stock- $0.01 par value
Common Stock - Authorized 75,000,000; Issued and Outstanding 30,097,274 at December 31,
2018 and 20,834,001 at December 31, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
301
208
Non-voting Common Stock- Authorized 10,000,000; Issued and Outstanding -0- at
December 31, 2018 and 3,845,860 at December 31, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional Paid-In Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained Earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated Other Comprehensive Income (Loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Shareholders' Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
38
66,324
69,508
1,084
137,162
Total Liabilities and Shareholders' Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,973,741 $ 1,616,612
—
126,031
96,234
(1,568)
220,998
See accompanying notes to consolidated financial statements.
76
Bridgewater Bancshares, Inc. and Subsidiaries
Consolidated Statements of Income
(dollars in thousands, except per share data)
INTEREST INCOME
Loans, Including Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Investment Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Interest Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
78,033 $
6,694
499
85,226
60,024 $
5,981
341
66,346
46,622
3,649
361
50,632
December 31, December 31, December 31,
2018
2017
2016
INTEREST EXPENSE
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FHLB Advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subordinated Debentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Funds Purchased . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Interest Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
NET INTEREST INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for Loan Losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
15,972
594
1,718
1,568
636
20,488
64,738
3,575
9,719
656
880
749
169
12,173
54,173
4,175
6,955
718
769
16
56
8,514
42,118
3,250
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
61,163
49,998
38,868
NONINTEREST INCOME
Customer Service Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Gain (Loss) on Sales of Available for Sale Securities . . . . . . . . . . . . . .
Net Gain (Loss) on Sales of Foreclosed Assets . . . . . . . . . . . . . . . . . . . . . . .
Other Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Noninterest Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
745
(125)
(225)
2,148
2,543
660
(250)
356
1,770
2,536
490
830
(30)
1,277
2,567
NONINTEREST EXPENSE
Salaries and Employee Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Occupancy and Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Noninterest Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
18,620
2,351
10,591
31,562
14,051
2,192
9,253
25,496
12,087
1,821
6,260
20,168
INCOME BEFORE INCOME TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
32,144
5,224
26,920 $
27,038
10,149
16,889 $
21,267
8,052
13,215
EARNINGS PER SHARE
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends Paid Per Share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.93 $
0.91
—
0.69 $
0.68
—
0.59
0.58
—
See accompanying notes to consolidated financial statements.
77
Bridgewater Bancshares, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
(dollars in thousands)
December 31, December 31, December 31,
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Other Comprehensive Income (Loss):
Unrealized Gains (Losses) on Available for Sale Securities . . . . . . . . . . . . .
Unrealized Gains on Cash Flow Hedge . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reclassification Adjustment for (Gains) Losses Realized in Income . . . . . .
Income Tax Impact . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Other Comprehensive Income (Loss), Net of Tax . . . . . . . . . . . . . . . . .
Comprehensive Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2018
26,920 $
2017
16,889 $
2016
13,215
(3,804)
9
125
824
(2,846)
24,074 $
6,354
121
250
(2,366)
4,359
21,248 $
(5,860)
223
(830)
2,264
(4,203)
9,012
See accompanying notes to consolidated financial statements.
78
Bridgewater Bancshares, Inc. and Subsidiaries
Consolidated Statements of Shareholders’ Equity
(dollars in thousands, except share data)
Shares
Common Stock
Additional
Paid--In Retained Comprehensive
Accumulated
Other
Voting
Non-voting Voting Non-voting Capital Earnings Income (Loss) Total
BALANCE, December 31, 2015 . . . 17,633,026 2,186,323 $ 176 $
—
—
1
Stock-based Compensation . . . . . . .
Comprehensive Income (Loss) . . . .
Stock Options Exercised . . . . . . . . .
Issuance of Common Stock, Net
—
—
100,000
—
—
—
22 $ 39,648 $39,404 $
—
222
—
— 13,215
—
—
99
—
928 $ 80,178
222
—
9,012
(4,203)
100
—
of Issuance Costs . . . . . . . . . . . . . 3,049,368 1,659,537
30
16
26,000
—
—
26,046
Redemption and Cancellation of
Common Stock . . . . . . . . . . . . . .
—
BALANCE, December 31, 2016 . . . 20,744,001 3,845,860
—
Stock-based Compensation . . . . . . .
(38,393)
—
Comprehensive Income . . . . . . . . .
Stock Options Exercised . . . . . . . . .
—
—
BALANCE, December 31, 2017 . . . 20,834,001 3,845,860
—
—
Stock-based Compensation . . . . . . .
Comprehensive Income (Loss) . . . .
Issuance of Common Stock, Net
—
90,000
—
—
—
207
—
—
1
208
—
—
—
38
—
—
—
38
—
—
(192)
—
65,777 52,619
—
368
—
179
16,889
—
66,324 69,508
—
— 26,920
799
—
(192)
(3,275) 115,366
368
—
—
4,359 21,248
180
1,084 137,162
799
(2,846) 24,074
—
of Issuance Costs . . . . . . . . . . . . . 5,379,513
—
54
—
58,803
—
—
58,857
Conversion of Non-voting Stock
to Voting Stock . . . . . . . . . . . . . . 3,845,860 (3,845,860)
—
37,900
38
1
(38)
—
—
105
—
—
—
—
—
106
Stock Options Exercised . . . . . . . . .
Reclassification of the Income Tax
Effects of the Tax Cuts and Jobs
Act to Retained Earnings . . . . . . .
—
BALANCE, December 31, 2018 . . . 30,097,274
—
—
— $ 301 $
—
(194)
—
— $126,031 $96,234 $
194
—
(1,568) $220,998
See accompanying notes to consolidated financial statements.
79
Bridgewater Bancshares, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Net Amortization on Securities Available for Sale . . . . . . . . . . . . . . . . . . . . . . . . .
Net (Gain) Loss on Sales of Securities Available for Sale . . . . . . . . . . . . . . . . . . .
Provision for Loan Losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and Amortization of Premises and Equipment . . . . . . . . . . . . . . . . . .
Amortization of Other Intangible Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of Subordinated Debt Issuance Costs . . . . . . . . . . . . . . . . . . . . . . . .
Net (Gain) Loss on Sale of Foreclosed Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in Operating Assets and Liabilities:
Accrued Interest Receivable and Other Assets . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued Interest Payable and Other Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Cash Provided by Operating Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CASH FLOWS FROM INVESTING ACTIVITIES
(Increase) Decrease in Bank-owned Certificates of Deposit . . . . . . . . . . . . . . . . . .
Proceeds from Sales of Securities Available for Sale . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from Maturities, Paydowns, Payups and Calls of Securities Available
for Sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of Securities Available for Sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Increase in Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Increase in FHLB Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of Premises and Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from Sales of Foreclosed Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash Received, Net of Cash Paid for Acquisition . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Cash Used in Investing Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Increase (Decrease) in Federal Funds Purchased . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from Notes Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Principal Payments on Notes Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from FHLB Advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Principal Payments on FHLB Advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from Issuance of Subordinated Debentures . . . . . . . . . . . . . . . . . . . . . . . . . .
Principal Payments on Subordinated Debentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock Options Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Redemption and Cancellation of Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Cash Provided by Financing Activities . . . . . . . . . . . . . . . . . . . . . . . . . . .
NET CHANGE IN CASH AND CASH EQUIVALENTS . . . . . . . . . . . . . . . . . . . . .
Cash and Cash Equivalents Beginning . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and Cash Equivalents Ending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
SUPPLEMENTAL CASH FLOW DISCLOSURE
Cash Paid for Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash Paid for Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans Transferred to Foreclosed Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31,
2018
December 31,
2017
December 31,
2016
$
26,920
$
16,889
$
13,215
3,028
125
3,575
761
191
103
225
799
(1,298)
(7,627)
2,606
29,408
(233)
24,684
22,965
(78,368)
(317,453)
(2,467)
(3,720)
356
—
(354,236)
221,584
(5,000)
—
(2,000)
70,000
(14,000)
—
—
106
58,857
—
329,547
4,719
23,725
28,444
19,987
7,865
—
2,779
250
4,175
694
191
43
(356)
368
(2,062)
(122)
2,053
24,902
1,627
36,209
23,411
(68,453)
(346,231)
(157)
(1,235)
4,647
—
(350,182)
315,842
(21,000)
—
(2,000)
29,000
(14,000)
24,484
—
180
—
—
332,506
7,226
16,499
23,725
11,334
12,110
689
$
$
1,997
(830)
3,250
586
104
—
30
222
(1,070)
(2,144)
(429)
14,931
6,753
34,250
21,995
(173,340)
(176,383)
(1,710)
(2,191)
115
24,415
(266,096)
195,679
31,000
20,000
(17,042)
—
—
—
(1,500)
100
26,046
(192)
254,091
2,926
13,573
16,499
8,444
10,103
3,601
$
$
$
$
See accompanying notes to consolidated financial statements.
80
Bridgewater Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(dollars in thousands, except share data)
Note 1: Description of the Business and Summary of Significant Accounting Policies
Organization
Bridgewater Bancshares, Inc. (the “Company”) is a financial holding company whose operations consist of the
ownership of its wholly-owned subsidiaries, Bridgewater Bank (the “Bank”) and Bridgewater Risk Management, Inc.
The Bank commenced operations in 2005 and provides retail and commercial loan and deposit services, principally to
customers within the Minneapolis-St. Paul-Bloomington, MN-WI Metropolitan Statistical Area. In 2008, the Bank
formed BWB Holdings, LLC, a wholly owned subsidiary of the Bank, for the purpose of holding repossessed property.
In 2018, the Bank formed Bridgewater Investment Management, Inc., a wholly owned subsidiary of the Bank, for the
purpose of holding certain municipal securities and to engage in municipal lending activities.
Bridgewater Risk Management, Inc. was incorporated in December 2016 as a wholly-owned insurance
company subsidiary of the 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.
Initial Public Offering
On March 16, 2018, the Company completed an initial public offering (“IPO”) and received net proceeds, after
deducting underwriting discounts and offering expenses, of $58.9 million for the shares of common stock sold by the
Company in the offering.
Exchange Agreement
During 2018, the Company exchanged a total of 3,845,860 shares of the Company’s non-voting common stock,
which represented 100% of the outstanding shares of non-voting common stock, for 3,845,860 shares of the Company’s
voting common stock. During the IPO, Castle Creek Capital Partners V, LP and GCP Capital Partners Holdings LLC
and certain of its affiliated/managed funds transferred 1,022,318 shares of the Company’s non-voting common stock to
the underwriters to be converted into shares of common stock. In October 2018, the Company entered into Exchange
Agreements with Castle Creek Capital Partners V, LP, EJF Sidecar Fund, Series LLC – Series E and Endeavour
Regional Bank Opportunities Fund II LP providing for the exchange of the remaining 2,823,542 shares of the
Company’s non-voting common stock for 2,823,542 shares of the Company’s common stock.
Principles of Consolidation
The 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 accounting principles generally
accepted in the United States of America (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.
81
Bridgewater Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(dollars in thousands, except share data)
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.
Emerging Growth Company
The Company qualifies as an “emerging growth company” under the Jumpstart Our Business Startups Act (the
“JOBS Act”). 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 this extended transition period.
Cash and Cash Equivalents
For purpose of the consolidated statements of cash flows, cash and cash equivalents include cash, both interest
bearing and noninterest bearing balances due from banks and federal funds sold, all of which mature within 90 days.
Cash flows from loans and deposits are reported net.
Bank-Owned Certificates of Deposit
Bank-owned certificates of deposit mature within five years and are carried at cost.
Securities Available for Sale
Debt securities are classified as available for sale and are carried at fair value with unrealized gains and losses
reported in other comprehensive income (loss). Realized gains and losses on securities available for sale are included in
noninterest income and, when applicable, are reported as a reclassification adjustment, net of tax, in other
comprehensive income (loss). Gains and losses on sales of securities are determined using the specific identification
method on the trade date. The amortization of premiums and accretion of discounts are recognized in interest income
using methods approximating the interest method over the period to maturity.
Declines in the fair value of individual available for sale securities below their cost that are other than
temporary result in write-downs of the individual securities to the fair value. The Company monitors the investment
security portfolio for impairment on an individual security basis and has a process in place to identify securities that
could potentially have a credit impairment that is other than temporary. This process involves analyzing 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 near-term prospects of the issuer, expected cash flows, and the Company’s intent
and ability to hold the investment for a period of time sufficient to recover the temporary loss. The ability to hold is
determined by whether it is more likely than not that the Company will be required to sell the security before its
anticipated recovery. A decline in value due to a credit event that is considered other than temporary is recorded as a loss
in noninterest income.
Loans
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off
generally are reported at their outstanding unpaid balances adjusted for charge-offs, the allowance for loan losses, any
deferred fees or costs on originated loans, and premiums or discounts on purchased loans.
82
Bridgewater Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(dollars in thousands, except share data)
Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct
origination costs, as well as premiums and discounts, are deferred and recognized as an adjustment of the related loan
yield using the interest method. Amortization of deferred loan fees is discontinued when a loan is placed on nonaccrual
status.
The accrual of interest on all loans is discounted if the loan is 90 days past due unless the credit is well-secured
and in process of collection. Past due status is based on contractual terms of the loan. In all cases, loans are placed on
nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful.
All interest accrued, but not collected for loans that are placed on nonaccrual or charged-off is reversed against
interest income and amortization of related deferred loan fees or costs is suspended. The interest on these loans is
accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. The cash-basis is used
when a determination has been made that the principal and interest of the loan is collectible. If collectability of the
principal and interest is in doubt, payments are applied to loan principal. The determination of ultimate collectability is
supported by a current, well documented credit evaluation of the borrower’s financial condition and prospects for
repayment, including consideration of the borrower’s sustained historical repayment performance and other relevant
factors. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought
current, the borrower has demonstrated a period of sustained performance, and future payments are reasonably assured.
A sustained period of repayment performance generally would be a minimum of six months.
Allowance for Loan Losses
The allowance for loan losses (the ‘‘allowance’’) is an estimate of loan losses inherent in the Company’s loan
portfolio. The allowance is established through a provision for loan losses which is charged to expense. Additions to the
allowance are expected to maintain the adequacy of the total allowance after loan losses and loan growth. Loan losses
are charged-off against the allowance when the Company determines all or a portion of the loan balance to be
uncollectible. Cash received on previously charged-off amounts is recorded as a recovery to the allowance.
The allowance consists of three primary components, general reserves, specific reserves related to impaired
loans, and unallocated reserves. The general component covers nonimpaired loans and is based on historical losses
adjusted for current factors. The historical loss experience is determined by portfolio segment and is based on the actual
loss history experienced by the Company over the most recent five years. This actual loss experience is adjusted for
economic factors based on the risks present for each portfolio segment. These economic factors include consideration of
the following: levels of and trends in delinquencies and impaired loans; trends in volume and terms of loans; experience,
ability, and depth of lending management and other relevant staff; national and local economic trends and conditions;
industry conditions; and effects of change in credit concentrations. These factors are inherently subjective and are driven
by the repayment risk associated with each portfolio segment.
A loan is considered impaired when, based on current information and events, it is probable that the Company
will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of
the loan agreement. Loans determined to be impaired are individually evaluated for impairment. 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. The fair value of
collateral, reduced by costs to sell on a discounted basis, is used if a loan is collateral dependent. A loan is collateral
dependent if the repayment is expected to be provided solely by the underlying collateral.
Allowance allocations other than general and specific reserves are included in the unallocated portion. While
allocations are made for loans and leases based upon historical loss analysis, the unallocated portion is designed to cover
the uncertainty of how current economic conditions and other uncertainties may impact the existing loan portfolio.
Factors to consider include global, national and state economic conditions such as changes in unemployment rates and
83
Bridgewater Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(dollars in thousands, except share data)
productivity, geopolitical tensions, monetary and fiscal policy uncertainty, political gridlock, and real estate market
trends. The unallocated reserve addresses inherent probable losses not included elsewhere in the allowance for loan
losses.
Under certain circumstances, the Company will provide borrowers relief through loan restructurings. A
restructuring of debt constitutes a troubled debt restructuring (TDR) if the Company, for economic or legal reasons
related to the borrower’s financial difficulties, grants a concession to the borrower that it would not otherwise consider.
Restructured loans typically present an elevated level of credit risk as the borrowers are not able to perform according to
the original contractual terms. Loans that are reported as TDRs are considered impaired and measured for impairment as
described above in the calendar year of the restructuring. In subsequent years, a restructured loan may cease being
classified as impaired if the loan was modified at a market rate and is performing according to the modified terms. TDR
concessions can include reduction of interest rates, extension of maturity dates, forgiveness of principal or interest due,
or acceptance of other assets in full or partial satisfaction of the debt. Restructured loans can involve loans remaining on
nonaccrual, moving to nonaccrual, or continuing on accrual status, depending on the individual facts and circumstances
of the borrower. Nonaccrual restructured loans are included and treated with other nonaccrual loans.
The Company assigns risk ratings to all loans and periodically performs detailed internal reviews of all such
loans over a certain threshold to identify credit risks and to assess the overall collectability of the portfolio. These risk
ratings are also subject to examination by the Company’s regulators. During the internal reviews, management monitors
and analyzes the financial condition of borrowers and guarantors, trends in the industries in which the borrowers operate,
and the fair values of collateral securing the loans. These credit quality indicators are used to assign a risk rating to each
individual loan. The risk ratings can be grouped into five major categories defined as follows:
Pass: A pass loan is a credit with no known or existing potential weaknesses deserving of management’s close
attention.
Watch: Loans classified as watch have a potential weakness that deserves management’s close attention. If left
uncorrected, this potential weakness may result in deterioration of the repayment prospects for the loan or of the
Company’s credit position at some future date. Watch loans are not adversely classified and do not expose the Company
to sufficient risk to warrant adverse classification.
Substandard: Loans classified as substandard are not adequately protected by the current net worth and paying
capacity of the borrower or of the collateral pledged, if any. Loans classified as substandard have a well-defined
weakness or weaknesses that jeopardize the repayment of the debt. Well defined weaknesses include a borrower’s lack
of marketability, inadequate cash flow or collateral support, failure to complete construction on time, or the failure to
fulfill economic expectations. They are characterized by the distinct possibility that the Company will sustain loss if the
deficiencies are not corrected.
Doubtful: Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with
the added characteristic that the weaknesses make collection or repayment in full, on the basis of currently existing facts,
conditions, and values, highly questionable and improbable.
Loss: Loans classified as loss are considered uncollectible and charged-off immediately.
The Company maintains a separate general valuation allowance for each portfolio segment. These portfolio
segments include commercial, construction and land development, 1-4 family mortgage, multifamily, CRE owner
occupied, CRE non-owner occupied, and consumer and other with risk characteristics described as follows:
Commercial: Commercial loans generally are loans to sole proprietorships, partnerships, corporations, and
other business enterprises to finance accounts receivable or inventory, capital assets, or for other business related
84
Bridgewater Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(dollars in thousands, except share data)
purposes. Commercial lending is not without risk as this asset class has generally exhibited higher loss rates compared to
other loan types. The primary repayment source for commercial and industrial loans are the existing cash flows of
operating businesses which can be adversely affected by company, industry and economic business cycles. Economic
trends influenced by unemployment rates and other key economic indicators are closely correlated to the credit quality of
these loans. The liquidation of collateral, typically accounts receivable, inventory, equipment, or other business assets, is
the primary source of principal repayment if the borrower defaults. The value of these assets can be uncertain in a
liquidation scenario.
Construction and Land Development: Construction and land development loans generally possess a higher
inherent risk of loss and have experienced the highest loss rates of any loan category based on statistics published by the
FDIC. Risks associated with these loans often include the borrower’s ability to complete the project within specified
costs and timelines and the reliance on the sale of the completed project as the primary repayment source for the loan.
Trends in the commercial and residential construction industries can significantly impact the credit quality of these loans
due to supply and demand imbalances. In addition, fluctuations in real estate values can significantly impact the credit
quality of these loans, as property values may determine the economic viability of construction projects and adversely
impact the value of the collateral securing the loan.
1-4 Family Mortgage: The degree of risk in residential mortgage lending involving owner occupied properties
depends primarily on the borrower’s ability to repay in an orderly fashion and the loan amount in relation to collateral
value. Economic trends determined by unemployment rates and other key economic indicators are closely correlated to
the credit quality of these loans. Weak economic trends indicate that the borrower’s capacity to repay their obligations
may be deteriorating. Residential mortgage lending also includes the credits to finance nonowner occupied properties
used as rentals. These loans can involve additional risks as the borrower’s ability to repay is based on the net operating
income from the property which can be impacted by occupancy levels, rental rates, and operating expenses. Declines in
net operating income can negatively impact the value of the property which increases the credit risk in the event of
default. While 1-4 family mortgage loans have historically possessed a lower inherent risk of loss than other real estate
portfolio segments, this loan class was significantly impacted during the last recession due in part to weak credit
underwriting and speculative lending practices which led to higher default rates and deterioration in residential real
estate values.
Multifamily: Multifamily lending has historically had the lowest default rate of any loan class. Nonetheless,
economic factors such as unemployment, wage growth and home affordability can impact vacancy rates and property
cash flow. In addition, an overbuilt supply of multifamily units can increase competition amongst properties and could
have an adverse effect on leasing rates and overall occupancy, which could result in higher default rates and possible
loan losses.
CRE Owner Occupied: Owner occupied commercial real estate loans are generally reliant on a single tenant
as the repayment source for the loan. The underlying business can be affected by changes in industry and economic
business cycles, unemployment and other key economic indicators, which could impact the cash flows of the business
and their ability to make rental payments. Certain types of businesses also may require specialized facilities that can
increase costs and may not be economically feasible to an alternative user, which could adversely impact the market
value of the collateral.
CRE Non-owner Occupied: Non-owner occupied commercial real estate loans can possess a higher inherent
risk of loss as the primary repayment source for these loans is based on the net operating income from the underlying
property. Changes in economic and market conditions can affect different segments of commercial real estate by
impacting overall leasing rates, absorption timelines, vacancy rates, and operating expenses. Banks which are
concentrated in commercial real estate lending are subject to additional regulatory scrutiny and must employ enhanced
risk management practices.
85
Bridgewater Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(dollars in thousands, except share data)
Consumer and Other: The consumer and other loan portfolio is usually comprised of a large number of small
loans scheduled to be amortized over a specific period. Most loans are made directly for consumer purchases. Economic
trends determined by unemployment rates and other key economic indicators are closely correlated to the credit quality
of these loans. Weak economic trends indicate the borrowers’ capacity to repay their obligations may be deteriorating.
Although management believes the allowance to be adequate, ultimate losses may vary from its estimates. At
least quarterly, the Board of Directors reviews the adequacy of the allowance, including consideration of the relevant
risks in the portfolio, current economic conditions, and other factors. If the Board of Directors and management
determine that changes are warranted based on those reviews, the allowance is adjusted. In addition, the Company’s
regulators assess the adequacy of the allowance from time to time. The regulatory agencies may require adjustments to
the allowance based on their judgement about information available at the time of their review and examinations.(cid:3)
Off-Balance Sheet Instruments
In the ordinary course of business, the Company has entered into off-balance sheet instruments including
commitments to extend credit and unfunded commitments under lines of credit, standby letters of credit, and commercial
letters of credit. Such financial instruments are recorded in the consolidated financial statements when they become
payable. The Company maintains a separate allowance for off-balance sheet commitments. Management estimates
anticipated losses using historical data and utilization assumptions. The allowance for off-balance sheet commitments is
included in other liabilities.
Federal Home Loan Bank Stock
The Bank is a member of FHLB Des Moines. Members are required to own a certain amount of stock based on
the level of borrowings and other factors, and may invest in additional amounts. Restricted stock is carried at cost and
periodically evaluated for impairment. Because this stock is viewed as a long-term investment, impairment is based on
ultimate recovery at par value. Both cash and stock dividends are reported as income.
Premises and Equipment
Land is stated at cost. Premises and equipment are stated at cost less accumulated depreciation on the straight-
line method over the estimated useful lives of the assets. Leasehold improvements are depreciated over the shorter of the
estimated useful life or lease term for leasehold improvements. Maintenance and repairs are expensed as incurred while
major additions and improvements are capitalized. Gains and losses on dispositions are included in current operations.
Foreclosed Assets
Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value
less estimated selling cost at the date of foreclosure, establishing a new cost basis. Any write-downs based on the asset’s
fair value at the date of acquisition are charged to the allowance. Subsequent to foreclosure, valuations are periodically
performed by management and the assets held for sale are carried at the lower of the new cost basis or fair value less cost
to sell. This evaluation is inherently subjective and requires estimates that are susceptible to significant revisions as more
information becomes available.
Impairment losses on assets to be held and used are measured at the amount by which the carrying amount of a
property exceeds its fair value. Costs relating to holding and improving assets are expensed. Revenues and expenses
from operations are included in other noninterest income and expense on the income statement.
86
Bridgewater Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(dollars in thousands, except share data)
Goodwill and Intangible Assets
Intangible assets attributed to the value of core deposits and favorable lease terms are stated at cost less
accumulated amortization and reported in other intangible assets in the consolidated balance sheets. Intangible assets are
amortized on a straight-line basis over the estimated lives of the assets.
The excess of purchase price over fair value of net assets acquired is recorded as goodwill and is not amortized.
The Company evaluates whether goodwill and other intangible assets may be impaired at least annually and
whenever events or changes in circumstances indicate it is more likely than not the fair value of the reporting unit or
asset is less than its carrying amount.
Transfers of Financial Assets and Participating Interests
Transfers of an entire financial asset or a participating interest in an entire financial asset are accounted for as
sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered
when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that
constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does
not maintain effective control over the transferred assets through an agreement to repurchase them before maturity.
The transfer of a participating interest in an entire financial asset must also meet the definition of a participating
interest. A participating interest in a financial asset has all of the following characteristics: (1) from the date of transfer,
it must represent a proportionate (pro rata) ownership interest in the financial asset, (2) from the date of transfer, all cash
flows received, except any cash flows allocated as any compensation for servicing or other services performed, must be
divided proportionately among participating interest holders in the amount equal to their share ownership, (3) the rights
of each participating interest holder must have the same priority, and (4) no party has the right to pledge or exchange the
entire financial asset unless all participating interest holders agree to do so.
Advertising
Advertising costs are expensed as incurred.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary
differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax
basis. 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. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
These calculations are based on many factors including estimates of the timing of reversals of temporary
differences, the interpretation of federal and state income tax laws, and a determination of the differences between the
tax and the financial reporting basis of assets and liabilities. Actual results could differ significantly from the estimates
and interpretations used in determining the current and deferred income tax liabilities.
Under GAAP, a valuation allowance is required to be recognized if it is ‘‘more likely than not’’ that the
deferred tax asset will not be realized. The determination of the realizability of the deferred tax assets is highly
subjective and dependent upon judgment concerning management’s evaluation of both positive and negative evidence,
the forecasts of future income, applicable tax planning strategies, and assessments of the current and future economic
and business conditions.
87
Bridgewater Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(dollars in thousands, except share data)
In preparation of the income tax returns, tax positions are taken based on interpretation of federal and state
income tax laws. Management periodically reviews and evaluates the status of uncertain tax positions and makes
estimates of amounts ultimately due or owed. The Company can recognize in financial statements the impact of a tax
position taken, or expected to be taken, if it is more likely than not that the position will be sustained on audit based on
the technical merit of the position. See Note 14 for additional disclosures. The Company recognizes both interest and
penalties as a component of other noninterest expenses.
The amount of the uncertain tax positions was not deemed to be material. It is not expected that the
unrecognized tax benefit will be material within the next 12 months. The Company did not recognize any interest or
penalties for the years ended December 31, 2018, 2017 and 2016.
The Company is no longer subject to federal or state tax examination by tax authorities for years ending before
December 31, 2015.
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. These investments are included in other assets on the balance sheet,
with any unfunded commitments included within other liabilities. The qualified affordable housing projects are
accounted for under the proportional amortization method and are over the period that the Company expects to receive
the tax credits, with the expense included within income tax expense on the consolidated statements of income. The
historic tax credits are accounted for under the equity method, with the expense included within noninterest expense on
the consolidated statements of income. Management analyzes these investments for potential impairment when events or
changes in circumstances indicate that it is more likely than not that the carrying amount of the investment will not be
realized. An impairment loss is measured as the amount by which the carrying amount of an investment exceeds its fair
value.
Comprehensive Income (Loss)
Recognized revenue, expenses, gains, and losses are included in net income. Certain changes in assets and
liabilities, such as unrealized gains and losses on securities available for sale and changes in the fair value of derivative
instruments designated as a cash flow hedge, are reported as a separate component of the equity section of the
consolidated balance sheets, such items, along with net income, are components of comprehensive income (loss).
Derivative Financial Instruments
The Company is exposed to certain risks in relation to its ongoing business operations. The primary risk
managed by using derivative instruments is interest rate risk. An interest rate swap was entered into to manage interest
rate risk associated with the Company’s variable rate notes payable.
Accounting standards require the Company to recognize all derivative instruments as either assets or liabilities
at fair value in the consolidated balance sheets. The Company designates its interest rate swap as a cash flow hedge of its
variable rate notes payable.
The changes in fair value of the interest rate swap agreement is recognized in earnings or in other
comprehensive income (loss) if the interest rate swap qualifies for hedge accounting. A derivative that does not qualify,
or is not designated as a hedge will be reflected at fair value, with changes in value recognized in noninterest income.
The effective portion of the changes in fair values of derivatives that qualify as cash flow hedges are recorded
in other comprehensive income (loss). Amounts receivable or payable under the swap agreement are reclassified from
88
Bridgewater Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(dollars in thousands, except share data)
other comprehensive income to net income as an adjustment to the expense of the related transaction. These amounts are
included in the consolidated statements of income as interest expense.
Stock-based Compensation
The Company’s stock-based compensation plans provide for awards of stock options to directors, officers and
employees. The cost of employee services received in exchange for awards of equity instruments is based on the grant-
date fair value of those awards. Compensation cost is recognized over the requisite service period as a component of
compensation expense. Compensation cost is recognized on a straight-line basis over the requisite service period for the
entire award. The Company uses the Black-Scholes model to estimate the fair value of stock options.
Reserve Balances
The Bank is required to maintain average balances with the Federal Reserve Bank. The Bank has implemented
a deposit reclassification program which allows the Bank to reclassify a portion of transaction accounts to nontransaction
accounts for reserve purposes. The deposit reclassification program was provided by a third-party vendor, and has been
approved by the Federal Reserve Bank. At December 31, 2018, the Bank was subject to maintaining an average balance
of $302.
Earnings per Share
Basic earnings per share are calculated by dividing the sum of distributed earnings to common shareholders and
undistributed earnings allocated to common shareholders by the weighted average number of common shares
outstanding. Diluted earnings per share are calculated by dividing the sum of distributed earnings to common
shareholders and undistributed earnings allocated to common shareholders by the weighted average number of shares
adjusted for the dilutive effect of stock options using the treasury stock method.
Segment Reporting
All of the Company’s operations are considered by management to be one operating segment.
Reclassifications
Certain reclassifications have been made to the 2017 consolidated financial statements to conform to the 2018
classifications.
Impact of Recently Adopted Accounting Standards
In March 2016, the FASB issued ASU 2016-05, Derivatives and Hedging (Topic 815): Effect of Derivative
Contract Novations on Existing Hedge Accounting Relationships (“ASU 2016-05”). The new guidance clarifies that a
change in the counterparty to a derivative instrument that has been designated as the hedging instrument under
Topic 815 does not, in and of itself, require de-designation of that hedging relationship provided that all other hedge
accounting criteria continue to be met. This guidance is effective for fiscal years beginning after December 15, 2017 and
interim reporting periods beginning after December 15, 2018. This ASU became effective for the Company on
January 1, 2018 and did not have a material impact on the Company’s consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, Compensation—Stock Compensation (Topic 718):
Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). The new guidance simplifies several
aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of
awards as either equity or liabilities, and classification on the statement of cash flows. Entities will be required to
89
Bridgewater Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(dollars in thousands, except share data)
recognize the income tax effects of awards in the income statement when the awards vest or are settled. This guidance is
effective for fiscal years beginning after December 15, 2017 and interim reporting periods beginning after December 31,
2018. This ASU became effective for the Company on January 1, 2018 and did not have a material impact on the
Company’s consolidated financial statements.
In May 2017, the Financial Accounting Standards Board (“FASB”) issued ASU 2017-09, Compensation –
Stock Compensation (Topic 718) (“ASU 2017-09”). ASU 2017-09 provides clarity about which changes to the terms or
conditions of a share-based payment award require an entity to apply modification accounting. The Company did not
modify any share-based payment awards, thus, the impact of adopting the new standard, effective January 1, 2018, had
no impact on the Company’s consolidated financial statements.
In February 2018, the FASB issued ASU 2018-02, Income Statement-Reporting Comprehensive Income
(Topic 220) (“ASU 2018-02”): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.
The amendments of this ASU allow a reclassification from accumulated other comprehensive income to retained
earnings for stranded tax effects resulting from Public Law 115-97, commonly known as the Tax Cuts and Jobs Act. The
Company elected to early adopt ASU 2018-02 and, as a result, reclassified $194 from accumulated other comprehensive
income to retained earnings as of January 1, 2018. The reclassification impacted the consolidated balance sheet and the
consolidated statement of shareholders’ equity as of and for the year ended December 31, 2018.
Impact of Recently Issued Accounting Standards
The following ASUs have been issued by 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 portion 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. Because of this,
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
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
90
Bridgewater Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(dollars in thousands, except share data)
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.) 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. The amendments
in this ASU are effective for fiscal years and interim reporting periods beginning after December 15, 2021.
All entities may adopt the amendments in the ASU as 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.
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
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
91
Bridgewater Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(dollars in thousands, except share data)
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 with 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.
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
92
Bridgewater Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(dollars in thousands, except share data)
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 following table presents the numerators and denominators for basic and diluted earnings per share
computations for the years ended December 31, 2018, 2017 and 2016:
Net Income Available to Common Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Weighted Average Common Stock Outstanding:
Year Ended December 31,
2017
16,889 $
2018
26,920 $
2016
13,215
Weighted Average Common Stock Outstanding (Basic) . . . . . . . . . . . . . . . . . . . . . .
Stock Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted Average Common Stock Outstanding (Dilutive) . . . . . . . . . . . . . . . . . . . .
29,001,393
434,821
29,436,214
24,604,464
413,226
25,017,690
22,294,837
336,904
22,631,741
Basic Earnings per Common Share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted Earnings per Common Share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.93 $
0.91
0.69 $
0.68
0.59
0.58
Note 3: Bank-Owned Certificates of Deposit
Certificates of deposit in other financial institutions by maturity are as follows:
2018
2017
Certificates of Deposit at Cost Maturing in:
One Year or Less . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,586 $
After One Year Through Five Years . . . . . . . . . . . . . . . . . . . . . . . . . . . .
992
2,080
$ 3,305 $ 3,072
1,719
Note 4: Securities
The following tables present the amortized cost and estimated fair value of securities with gross unrealized
gains and losses at December 31, 2018 and 2017:
December 31, 2018
Gross
Gross
Amortized Unrealized Unrealized
Gains
Losses
Cost
Fair Value
Securities Available for Sale:
U.S. Treasury Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 17,862 $
Municipal Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage-Backed Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
SBA Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(19) $ 17,897
118,133
47,176
21,118
49,054
Total Securities Available for Sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 255,715 $ 1,448 $ (3,785) $ 253,378
117,991
48,816
21,170
49,876
(1,115)
(1,692)
(124)
(835)
1,257
52
72
13
54 $
93
Bridgewater Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(dollars in thousands, except share data)
December 31, 2017
Gross
Gross
Amortized Unrealized Unrealized
Gains
Losses
Cost
Fair Value
Securities Available for Sale:
Municipal Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 115,784 $ 3,005 $
Mortgage-Backed Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
SBA Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(469) $ 118,320
60,681
5,107
45,383
Total Securities Available for Sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 228,149 $ 3,338 $ (1,996) $ 229,491
61,945
5,052
45,368
(1,275)
(25)
(227)
11
80
242
The following table shows 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:
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
15,405
Municipal Bonds . . . . . . . . . . . . . . . . . . . . . . . .
1,751
Mortgage-Backed Securities . . . . . . . . . . . . . .
9,063
Corporate Securities . . . . . . . . . . . . . . . . . . . . .
28,186
SBA Securities . . . . . . . . . . . . . . . . . . . . . . . . .
Total Securities Available for Sale . . . . . . . . $ 69,271 $
— $ 14,866 $
(19)
(19)
(1,115)
(916)
(199)
(1,692)
(1,671)
(21)
(124)
(50)
(74)
(835)
(469)
(366)
(679) $ 93,822 $ (3,106) $ 163,093 $ (3,785)
49,577
43,527
11,059
44,064
—
34,172
41,776
1,996
15,878
Less Than 12 Months
12 Months or Greater
Total
Unrealized
Unrealized
Unrealized
Fair Value Losses
Fair Value Losses
Fair Value Losses
December 31, 2017
Municipal Bonds . . . . . . . . . . . . . . . . . . . . . . . . . $ 15,043 $
Mortgage-Backed Securities . . . . . . . . . . . . . . .
Corporate Securities . . . . . . . . . . . . . . . . . . . . . .
SBA Securities . . . . . . . . . . . . . . . . . . . . . . . . . .
16,046
—
15,634
Total Securities Available for Sale . . . . . . . . . $ 46,723 $
(89) $ 21,111 $
(380) $ 36,154 $
(469)
(1,275)
(1,170)
(105)
(25)
(25)
—
(189)
(227)
(38)
(383) $ 68,714 $ (1,613) $ 115,437 $ (1,996)
57,846
2,028
19,409
41,800
2,028
3,775
At December 31, 2018, 195 debt securities had unrealized losses with aggregate depreciation of approximately
2.3% from the Company’s amortized cost basis. At December 31, 2017, 133 debt securities had unrealized losses with
aggregate depreciation of approximately 1.7% 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 debt securities for the foreseeable future, no declines were deemed to be other than temporary as of
December 31, 2018 and 2017.
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 December 31, 2018. Call date is used when a call of the debt security is
expected, determined by the Company when the security has a market value above its amortized cost. Contractual
94
Bridgewater Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(dollars in thousands, except share data)
maturities will differ from expected maturities for mortgage-backed and SBA securities because borrowers may have the
right to call or prepay obligations without penalties.
December 31, 2018
Due in One Year or Less . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Due After One Year Through Five Years . . . . . . . . . . . . . . . . . . . . . .
Due After Five Years Through 10 Years . . . . . . . . . . . . . . . . . . . . . . .
Due After 10 Years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage-Backed Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
SBA Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Amortized Cost Fair Value
13,244 $ 13,248
31,364
31,176
73,336
73,041
39,200
39,562
157,148
157,023
47,176
48,816
49,876
49,054
255,715 $ 253,378
As of December 31, 2018, the securities portfolio was completely unencumbered. To increase on-balance sheet
liquidity, all securities previously pledged to secure public deposits had the designation removed and an alternative
means of permissible collateralization was utilized, primarily Federal Home Loan Bank letters of credit. As of
December 31, 2017, the amortized cost and fair value of securities pledged to secure public deposits and for other
purposes required or permitted by law were $79,400 and $81,639, respectively.
The following is a summary of the proceeds from sales of securities available for sale, as well as gross gains
and losses, for the years ended December 31, 2018, 2017 and 2016:
2018
2017
2016
Proceeds From Sales of Securities . . . . . . . . . . . . . . . . . . . . . . . $ 24,684 $ 36,209 $ 34,250
1,044
Gross Gains on Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(214)
Gross Losses on Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
290
(415)
405
(655)
Note 5: Loans
The following table presents the components of loans at December 31, 2018 and 2017:
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Construction and Land Development . . . . . . . . . . . . . . . . . . . . . . . .
Real Estate Mortgage:
2017
2018
260,833 $ 217,753
130,586
210,041
December 31, December 31,
1-4 Family Mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Multifamily . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CRE Owner Occupied . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CRE Non-owner Occupied . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Real Estate Mortgage Loans . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer and Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Loans, Gross . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for Loan Losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Deferred Loan Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
195,707
317,872
65,909
415,034
994,522
4,252
1,347,113
(16,502)
(4,104)
Total Loans, Net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,640,385 $ 1,326,507
226,773
407,934
64,458
490,632
1,189,797
4,260
1,664,931
(20,031)
(4,515)
95
Bridgewater Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(dollars in thousands, except share data)
The following table presents the activity in the allowance for loan losses, by segment, for the years ended
December 31, 2018, 2017 and 2016:
Construction
and Land 1-4 Family
CRE
CRE
Owner Non-owner Consumer
Commercial Development Mortgage Multifamily Occupied Occupied and Other Unallocated Total
Balance at January 1,
2016 . . . . . . . . . . . . . . . . . $
Provision for Loan Losses. .
Loans Charged-off . . . . . . .
Recoveries of Loans . . . . . .
Balance at December 31,
2016 . . . . . . . . . . . . . . . . . $
Provision for Loan Losses. .
Loans Charged-off . . . . . . .
Recoveries of Loans . . . . . .
Balance at December 31,
2017 . . . . . . . . . . . . . . . . . $
Provision for Loan Losses. .
Loans Charged-off . . . . . . .
Recoveries of Loans . . . . . .
Balance at December 31,
1,349 $
(28)
(107)
101
1,315 $
1,116
(1)
5
2,435 $
448
(10)
25
1,708 $
(89)
(248)
8
1,765 $
614
(1)
32
871 $ 1,019 $
264
697
(123)
—
—
—
2,452 $
1,484
(613)
—
1,379 $
488
—
25
2,410 $
(230)
—
137
1,568 $ 1,160 $
(204)
1,602
—
—
—
—
3,323
1,875
(111)
—
1,892 $
632
(358)
285
2,317 $
242
(21)
59
3,170 $
1,474
—
—
956 $
(148)
—
—
5,087 $
785
—
—
36 $
60
(22)
4
78 $
43
(65)
4
60 $
31
(32)
6
852 $ 10,052
248
3,250
— (1,114)
145
—
1,100 $ 12,333
4,175
(515)
(177)
—
171
—
585 $ 16,502
3,575
111
(421)
—
375
—
2018 . . . . . . . . . . . . . . . . . $
2,898 $
2,451 $
2,597 $
4,644 $
808 $
5,872 $
65 $
696 $ 20,031
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 December 31, 2018 and 2017:
Construction
and Land 1--4 Family
CRE
Owner
CRE
Non-owner Consumer
Allowance for Loan Losses at December 31, 2018
Individually Evaluated for Impairment . . . . . . . $
Collectively Evaluated for Impairment . . . . . . .
Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,898 $
2,890
8 $
— $
17 $
— $
2,451
2,451 $ 2,597 $ 4,644 $
4,644
2,580
— $
22 $
786
808 $ 5,872 $
5,872
Commercial Development Mortgage Multifamily Occupied Occupied and Other Unallocated Total
Allowance for Loan Losses at December 31, 2017
Individually Evaluated for Impairment . . . . . . . $
Collectively Evaluated for Impairment . . . . . . .
Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,435 $
14 $
2,421
— $
57 $
14 $
24 $
— $
1,892
1,892 $ 2,317 $ 3,170 $
3,156
2,260
5,087
932
956 $ 5,087 $
— $
65
65 $
47
— $
696
19,984
696 $ 20,031
— $
60
60 $
— $
109
585
16,393
585 $ 16,502
Loans at December 31, 2018
Commercial Development Mortgage
Multifamily Occupied Occupied
2,305
Individually Evaluated for Impairment . . . . . . $
Collectively Evaluated for Impairment . . . . . .
1,662,626
Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 260,833 $ 210,041 $ 226,773 $ 407,934 $ 64,458 $ 490,632 $ 4,260 $ 1,664,931
407,934
260,825
490,632
225,097
209,843
1,676 $
64,093
4,202
198 $
365 $
— $
— $
8 $
and Other
58 $
Total
Construction
CRE
CRE
and Land
1--4 Family
Owner
Non-owner Consumer
Loans at December 31, 2017
4,596
Individually Evaluated for Impairment . . . . . . $
Collectively Evaluated for Impairment . . . . . .
1,342,517
Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 217,753 $ 130,586 $ 195,707 $ 317,872 $ 65,909 $ 415,034 $ 4,252 $ 1,347,113
66 $ 2,165 $
317,806
217,739
130,003
194,014
415,034
1,693 $
63,744
4,177
583 $
75 $
14 $
— $
96
Bridgewater Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(dollars in thousands, except share data)
The following table presents information regarding total carrying amounts and total unpaid principal balances
of impaired loans by loan segment as of December 31, 2018 and 2017:
December 31, 2018
December 31, 2017
Recorded Principal Related Recorded Principal Related
Investment Balance Allowance Investment Balance Allowance
Loans With No Related Allowance for Loan Losses:
Construction and Land Development . . . . . . . . . . . . $
Real Estate Mortgage:
198 $ 807 $
— $
583 $ 833 $
—
HELOC and 1-4 Family Junior Mortgage . . . . . . . . . .
1st REM - 1-4 Family . . . . . . . . . . . . . . . . . . . . . . . . . .
1st REM - Rentals . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CRE Owner Occupied . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer and Other . . . . . . . . . . . . . . . . . . . . . . . . . .
Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
157
253
957
209
58
1,832
157
253
957
209
78
2,461
—
—
—
—
—
—
508
125
726
2,006
75
4,023
515
125
726
2,023
92
4,314
—
—
—
—
—
—
Loans With An Allowance for Loan Losses:
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real Estate Mortgage:
HELOC and 1-4 Family Junior Mortgage . . . . . . . . . .
LOCs and 2nd REM - Rentals . . . . . . . . . . . . . . . . . . .
1st REM - Rentals . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Multifamily . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CRE Owner Occupied . . . . . . . . . . . . . . . . . . . . . . . . .
Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8
8
8
14
14
14
309
—
—
—
156
473
336
—
—
—
156
500
17
—
—
—
22
47
47 $ 4,596 $ 4,887 $
—
64
270
66
159
573
—
64
270
66
159
573
—
47
10
14
24
109
109
Grand Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,305 $ 2,961 $
97
Bridgewater Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(dollars in thousands, except share data)
The following table presents information regarding the average balances and interest income recognized on
impaired loans by loan segment for the years ended December 31, 2018, 2017 and 2016:
Year Ended December 31, Year Ended December 31, Year Ended December 31,
2017
2016
2018
Average
Interest
Average
Interest
Average
Interest
Investment Recognized Investment Recognized Investment Recognized
Loans With No Related Allowance for
Loan Losses:
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . $
Construction and Land Development . . . .
Real Estate Mortgage:
HELOC and 1-4 Family Junior Mortgage . .
1st REM - 1-4 Family . . . . . . . . . . . . . . . . . .
1st REM - Rentals . . . . . . . . . . . . . . . . . . . . .
CRE Owner Occupied . . . . . . . . . . . . . . . . .
CRE Non-owner Occupied . . . . . . . . . . . . .
Consumer and Other . . . . . . . . . . . . . . . . . .
Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans With An Allowance for Loan Losses:
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction and Land Development . . . .
Real Estate Mortgage:
—
212
158
255
976
225
—
64
1,890
8
—
—
—
9
10
48
13
—
—
80
—
—
—
594
537
130
739
2,042
—
97
4,139
— $
—
2,051
759
20
—
34
97
—
—
151
271
960
1,025
1,325
1,115
9
7,515
14
—
—
—
—
19
HELOC and 1-4 Family Junior Mortgage . .
LOCs and 2nd REM - Rentals . . . . . . . . . . .
1st REM - Rentals . . . . . . . . . . . . . . . . . . . . .
Multifamily . . . . . . . . . . . . . . . . . . . . . . . . . .
CRE Owner Occupied . . . . . . . . . . . . . . . . .
Consumer and Other . . . . . . . . . . . . . . . . . .
Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Grand Totals . . . . . . . . . . . . . . . . . . . . . . . . . . $
324
—
—
65
158
—
555
2,445 $
—
—
—
3
7
—
10
90 $
—
65
276
66
161
—
582
4,721 $
—
3
14
3
7
—
27
178 $
—
69
274
68
165
97
692
8,207 $
102
5
16
—
50
66
57
—
296
—
1
—
3
14
3
7
—
28
324
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.
98
Bridgewater Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(dollars in thousands, except share data)
The following tables present the risk category of loans by loan segment as of December 31, 2018 and 2017,
based on the most recent analysis performed by management:
Pass
December 31, 2018
Watch Substandard
Total
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Construction and Land Development . . . . . . . . . . . . . . . . . . . . . . .
Real Estate Mortgage:
HELOC and 1-4 Family Junior Mortgage . . . . . . . . . . . . . . . . . . . . .
1st REM - 1-4 Family . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
LOCs and 2nd REM - Rentals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1st REM - Rentals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Multifamily . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CRE Owner Occupied . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CRE Non-owner Occupied . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer and Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
260,225 $
207,174
600 $
2,669
30,669
37,526
11,341
142,357
407,934
62,223
487,438
4,202
587
126
628
1,854
—
—
3,194
—
Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,651,089 $ 9,658 $
8 $ 260,833
210,041
198
—
253
474
958
—
2,235
—
58
31,256
37,905
12,443
145,169
407,934
64,458
490,632
4,260
4,184 $ 1,664,931
December 31, 2017
Pass
Watch
Substandard
217,739 $
130,003
— $
—
14 $
583
Total
217,753
130,586
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Construction and Land Development . . . . . . . . . . . . . . . . . . . .
Real Estate Mortgage:
HELOC and 1-4 Family Junior Mortgage . . . . . . . . . . . . . . . . . .
1st REM - 1-4 Family . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
LOCs and 2nd REM - Rentals . . . . . . . . . . . . . . . . . . . . . . . . . . .
1st REM - Rentals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Multifamily . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CRE Owner Occupied . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CRE Non-owner Occupied . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer and Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
28,238
33,219
13,409
118,891
317,806
63,290
409,533
4,177
Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,336,305 $
—
—
—
—
—
—
5,501
—
5,501 $
347
125
225
1,253
66
2,619
—
75
28,585
33,344
13,634
120,144
317,872
65,909
415,034
4,252
5,307 $ 1,347,113
The following tables present the aging of the recorded investment in past due loans by loan segment as of
December 31, 2018 and 2017:
December 31, 2018
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Construction and Land Development . . . . . . . . . . .
Real Estate Mortgage:
Current
Accruing Interest
30-89 Days
90 Days or
Past Due More Past Due Nonaccrual
260,813 $
209,843
12 $
—
— $
—
8 $
198
Total
260,833
210,041
HELOC and 1-4 Family Junior Mortgage . . . . . . . . .
1st REM - 1-4 Family . . . . . . . . . . . . . . . . . . . . . . . . .
LOCs and 2nd REM - Rentals . . . . . . . . . . . . . . . . . .
1st REM - Rentals . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Multifamily . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CRE Owner Occupied . . . . . . . . . . . . . . . . . . . . . . . .
CRE Non-owner Occupied . . . . . . . . . . . . . . . . . . . .
Consumer and Other . . . . . . . . . . . . . . . . . . . . . . . . .
30,939
37,705
12,443
145,169
407,934
64,360
490,632
4,201
Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,664,039 $
—
200
—
—
—
98
—
1
311 $
—
—
—
—
—
—
—
— $
317
—
—
—
—
—
—
58
31,256
37,905
12,443
145,169
407,934
64,458
490,632
4,260
581 $ 1,664,931
99
Bridgewater Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(dollars in thousands, except share data)
December 31, 2017
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Construction and Land Development . . . . . . . . . . .
Real Estate Mortgage:
Current
Accruing Interest
90 Days or
30-89 Days
Past Due More Past Due Nonaccrual
217,734 $
130,003
10 $
—
— $
—
9 $
583
Total
217,753
130,586
HELOC and 1-4 Family Junior Mortgage . . . . . . . . .
1st REM - 1-4 Family . . . . . . . . . . . . . . . . . . . . . . . . .
LOCs and 2nd REM - Rentals . . . . . . . . . . . . . . . . . .
1st REM - Rentals . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Multifamily . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CRE Owner Occupied . . . . . . . . . . . . . . . . . . . . . . . .
CRE Non-owner Occupied . . . . . . . . . . . . . . . . . . . .
Consumer and Other . . . . . . . . . . . . . . . . . . . . . . . . .
28,238
33,219
13,474
119,876
317,872
65,686
415,034
4,174
Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,345,310 $
—
—
160
268
—
223
—
3
664 $
28,585
347
—
33,344
125
—
13,634
—
—
120,144
—
—
317,872
—
—
65,909
—
—
415,034
—
—
—
4,252
75
— $ 1,139 $ 1,347,113
At December 31, 2018, there were three loans classified as troubled debt restructurings with a current
outstanding balance of $437. In comparison, at December 31, 2017, there were nine loans classified as troubled debt
restructurings with an outstanding balance of $2,928 .There were no new loans classified as troubled debt restructurings
during the year ended December 31, 2018 and no loans classified as troubled debt restructurings during the previous
twelve months that subsequently defaulted during the year ended December 31, 2018.
Note 6: Premises and Equipment
Premises and equipment are summarized as follows for the years ended December 31, 2018 and 2017:
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Building . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leasehold Improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 - 10 Years
Furniture and Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction in Progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3 - 5 Years
N/A
N/A
39 Years
Estimated
Useful Lives
December 31,
$
2018
5,174 $
3,462
2,718
3,191
2,494
17,039
(3,965)
2017
3,335
4,898
2,251
2,730
176
13,390
(3,275)
$ 13,074 $ 10,115
Depreciation and amortization expense charged to noninterest expense for the years ended December, 31, 2018,
2017 and 2016, totaled $761, $694, and $586, respectively.
100
Bridgewater Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(dollars in thousands, except share data)
Pursuant to the terms of non-cancelable lease agreements in effect at December 31, 2018, pertaining to banking
premises in Bloomington, Downtown Minneapolis, St. Paul, and Uptown Minneapolis Drive-Up, total future minimum
rent commitments under various operating leases are as follows:
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 876
776
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
336
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
327
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
319
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,454
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,088
2018
Rent expense, including common area maintenance pertaining to banking premises for the years ended
December, 31, 2018, 2017 and 2016, amounted to $870, $774, and $684, respectively.
The Bloomington, Downtown Minneapolis, St. Paul, and Uptown Minneapolis Drive-Up leases each contain
two consecutive options to extend the lease for a period of five years each. The monthly minimum rent payable will be at
the market rate as reasonably determined by the lessor.
Pursuant to the terms of the non-cancelable lease agreement with Bridgewater Properties Greenwood, LLC, a
related party through common ownership, in effect at December 31, 2018, pertaining to the Greenwood location, future
minimum rent commitments under the operating lease are listed below. The Greenwood lease contains two consecutive
options to extend the lease for a period of five years each.
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 161
164
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
111
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 436
2018
Note 7: Intangible Assets
The following table presents an analysis of intangible assets at December, 31, 2018 and 2017:
Core Deposit Intangible . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,093 $ 1,093
445
Favorable Lease . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,538
Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(295)
Accumulated Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,052 $ 1,243
445
1,538
(486)
December 31,
2018
2017
Amortization expense of intangible assets was $191 for the years ended December, 31 2018 and 2017 and $104
for the year ended December 31, 2016.
101
Bridgewater Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(dollars in thousands, except share data)
The following table shows the estimated future amortization of the core deposit premium intangible and
favorable lease asset for the next five years and thereafter. The projections of amortization expense are based on existing
asset balances as of December 31, 2018.
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Core Deposit Favorable
Intangible Lease
157
157
157
157
65
-
693
34
34
34
34
34
189
359
$
$
Note 8: Deposits
The following table presents the composition of deposits at December 31, 2018 and 2017:
Transaction Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 548,770 $ 469,831
369,942
Savings and Money Market Deposits . . . . . . . . . . . . . . . . . . . . . . . .
292,096
Time Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
207,481
Brokered Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,560,934 $ 1,339,350
402,639
318,356
291,169
December 31,
2018
2017
Brokered deposits contain brokered money market accounts of $26,990 and $23,810 as of December, 31, 2018
and 2017, respectively. Included within the December 31, 2017 brokered money market accounts was $13,482 of
reciprocal deposits, which, by law, were no longer classified as brokered as of December 31, 2018.
The following table presents the scheduled maturities of brokered and customer time deposits at December 31,
2018:
Less than 1 Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 126,480
206,677
1 to 2 Years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
102,970
2 to 3 Years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
86,413
3 to 4 Years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
59,995
Over 4 Years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 582,535
2018
The aggregate amount of time deposits greater than $250 was approximately $111,297 and $104,984 at
December, 31, 2018 and 2017, respectively.
Note 9: Notes Payable
During 2016, the Company entered into a note payable with an unaffiliated financial institution that is secured
by 100% of the stock of the Bank. The proceeds of the note were partially used to payoff existing notes payable. The
note requires interest payments monthly and principal payments of $500 quarterly. Interest is accrued at a variable rate
equal to 1-month LIBOR plus 2.40% and matures in February 2021. The interest rate at December, 31, 2018 and 2017,
102
Bridgewater Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(dollars in thousands, except share data)
was 4.75% and 3.76%, respectively. The note contains several financial and reporting covenants. As of December, 31,
2018 and 2017, the Company believes it was in compliance with all covenants. The unpaid principal balance of the note
at December, 31, 2018 and 2017, was $15,000 and $17,000, respectively.
Note 10: Derivative Instruments and Hedging Activities
Cash Flow Hedging Instruments
During 2016, the Company entered into an interest rate swap agreement with a third party in order to hedge
interest rate risk associated with its variable rate note payable. The following table presents a summary of the
outstanding interest rate swap used in a cash flow hedge as of December 31, 2018 and 2017:
Notional Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 15,000
Average Notional Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
15,750
Weighted Average Pay Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted Average Receive Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted Average Maturity (Years) . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Unrealized Gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
1.21 %
1.97 %
2.16
352
2018
2017
$ 17,000
17,750
1.21 %
1.07 %
3.16
344
$
This agreement provides for the Company to make payments at a fixed rate in exchange for receiving payments
at a variable rate determined by 1-month LIBOR. The notional amount is amortized on the same schedule as the note
payable and matures on the same date. The swap is determined to be fully effective. The unrealized gain is included in
other assets in the consolidated balance sheets.
Note 11: Federal Home Loan Bank Advances and Other Borrowings
Federal Home Loan Bank Advances. The Company has entered into an Advances, Pledge, and Security
Agreement with the FHLB whereby specific mortgage loans of the Bank’s with principal balances of $577,241 and
$490,463 at December, 31, 2018 and 2017, respectively, were pledged to the Federal Home Loan Bank as collateral in
the event the Company requests any advances on the line. FHLB advances are also secured with FHLB stock owned by
the Company. Total remaining available borrowings were $122,120 and $180,942 at December, 31, 2018 and 2017,
respectively.
The following table presents FHLB advances, by maturity, at December, 31, 2018 and 2017:
Weighted
Average
Rate
2018
2017
Weighted
Total
Average
Total
Outstanding Rate
N/A
—
$
1.47 % 20,000
5,000
1.65
15,000
1.99
29,000
2.50
40,000
3.03
5,000
3.17
10,000
3.29
$ 124,000
Outstanding
1.49 % 14,000
20,000
1.47
1.65
5,000
15,000
1.99
14,000
2.10
—
N/A
—
N/A
—
N/A
$ 68,000
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2025 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
103
Bridgewater Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(dollars in thousands, except share data)
Federal Reserve Discount Window. At December, 31, 2018 and 2017, the Company had the ability to draw
additional borrowings of $114,051 and $37,530, respectively, from the Federal Reserve Bank of Minneapolis. The
ability to draw borrowings is based on loan collateral pledged with principal balances of $159,616 and $47,590 as of
December, 31, 2018 and 2017, subject to the approval from the Board of Governors of the Federal Reserve System.
Federal Funds Purchased. Federal funds purchased mature one business day from the transaction date. There
were $18,000 and $23,000 of federal funds purchased outstanding as of December, 31, 2018 and 2017, respectively. The
interest rate as of December, 31, 2018 and 2017, was 2.63% and 1.63%, respectively.
Note 12: Subordinated Debentures
On July 12, 2017, the Company entered into a Subordinated Note Purchase Agreement with certain institutional
accredited investors (the “Purchasers”) whereby the Company sold and issued $25,000 in aggregate principal amount of
fixed-to-floating subordinated notes due 2027 (the “Notes”). The Notes were issued by the Company to the Purchasers at
a price equal to 100% of their face amount. Issuance costs were $516 and have been netted against Subordinated Debt on
the consolidated balance sheets. These costs are being amortized over five years, which represents the period from
issuance to the first redemption date of July 15, 2022. Total amortization expense for the year ended December 31, 2018
was $103, respectively, with $370 remaining to be amortized as of December 31, 2018. Total amortization expense for
the year ended December 31, 2017 was $43, with $473 remaining to be amortized as of December 31, 2017.
The Notes mature on July 15, 2027, with a fixed interest rate of 5.875% payable semiannually in arrears for
five years until July 15, 2022. Thereafter, the Company will be obligated to pay interest at a rate equal to 3-month
LIBOR plus 388 basis points quarterly in arrears until either the early redemption date or the maturity date. The
Notes are not convertible into or exchangeable for any other securities or assets of the Company or any of its
subsidiaries. The Notes are redeemable by the Company, in whole or in part, on or after July 15, 2022, and at any time
upon the occurrence of certain events. Any redemption by the Company would be at a redemption price equal to 100%
of the outstanding principal amount of the Notes being redeemed, including any accrued and unpaid interest thereon.
Note 13: Related-Party Transactions
In the ordinary course of business, the Company has granted loans to executive officers, directors, principal
shareholders, and their affiliates (related parties). The following table presents the activity associated with loans made
between related parties for the years ended December, 31, 2018 and 2017:
Beginning Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,344 $ 15,149
7,858
New Loans and Advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(5,368)
Repayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(6,295)
Changes to Related Parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 39,454 $ 11,344
35,761
(7,653)
2
2018
2017
Deposits from related parties held by the Company at December, 31, 2018 and 2017 were $8,856 and $4,039,
respectively.
The Company has a related party lease which is disclosed in Note 6.
During 2018, the Company entered into an Exchange Agreement with Castle Creek Capital Partners V, LP
providing for the exchange of 1,431,796 shares of the Company’s non-voting common stock for 1,431,796 shares of the
Company’s voting common stock.
104
Bridgewater Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(dollars in thousands, except share data)
Note 14: Income Taxes
On December 22, 2017, the President of the United States signed into law Public Law 115-97, commonly
known as the Tax Cuts and Jobs Act, which amends the Internal Revenue Code to reduce tax rates and modify policies,
credits, and deductions for individuals and businesses. For businesses, the Tax Cuts and Jobs Act reduced the federal
corporate tax rate from a maximum of 35% to a flat rate of 21%. The rate reduction was effective January 1, 2018.
The lower corporate income tax rate reduces the future net tax benefits of timing differences between book and
taxable income recorded by the Company as a net deferred tax asset. As of December 31, 2017, the Company revalued
its net deferred tax assets and recorded a one-time additional income tax expense of $2,005 related to the write-down of
deferred tax assets for tax benefits that the Company does not expect to realize.
The following table presents the allocation of federal and state income taxes between current and deferred
portions as of December, 31, 2018, 2017, and 2016:
2018
2017
2016
Current Tax Provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,522 $ 10,206 $ 9,122
(1,070)
Deferred Tax Benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Change in Deferred Taxes Due to Enacted Changes in Tax Law . . . . .
Total Income Tax Provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,224 $ 10,149 $ 8,052
(2,062)
2,005
(1,298)
—
The reasons for the differences between the statutory federal income tax rate and the effective tax rates are
summarized as follows as of December, 31, 2018, 2017, and 2016:
Amount of Statutory Rate . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,750
State Income Taxes (Net of Federal Income Tax Benefit)
2,755
Interest on Investment Securities and Loans Exempt
2018
2017
Amount Percent Amount Percent Amount Percent
35.0 %
6.5
21.0 %$ 9,463
1,757
35.0 %$ 7,443
1,377
8.6
6.5
2016
From Federal Income Tax . . . . . . . . . . . . . . . . . . . . . . . .
Historic Tax Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred Tax Asset Revaluation . . . . . . . . . . . . . . . . . . . . .
Other Differences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(719)
(3,207)
—
(355)
Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,224
(2.2)
(10.0)
—
(1.1)
(1,170)
(1,621)
2,005
(285)
16.3 %$ 10,149
(829)
(4.3)
—
(6.0)
—
7.4
(1.1)
61
37.5 %$ 8,052
(3.9)
—
—
0.3
37.9 %
The impact of the deferred tax asset revaluation was offset primarily by the effects of certain federal historic tax
credits utilized in the current period. The Company utilizes these credits when the project is placed in service. The
Company’s effective tax rate may fluctuate as it is impacted by the level and timing of the Company’s utilization of
historic tax credits, low-income housing tax credits, the level of tax-exempt investments and loans, and the overall level
of pre-tax income.
105
Bridgewater Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(dollars in thousands, except share data)
The following table presents the components of the net deferred tax asset included in other assets, as of
December, 31, 2018 and 2017:
2018
2017
Start-up Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for Loan Losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized (Gain) Loss on Securities Available for Sale . . . . . . . . . . . .
Unrealized Gain on Cash Flow Hedge . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreclosed Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
33
(27)
4,743
(335)
(72)
13
(329)
495
199
Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,842 $ 4,720
(249)
5,757
491
(74)
—
(496)
651
747
15 $
Note 15: 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 summarizes the Company’s investments in qualified affordable housing projects and other
tax credit investments at December 31, 2018 and 2017:
December 31, 2018
December 31, 2017
Investment
Low Income Housing Tax Credit (LIHTC) . . . Proportional Amortization $
Federal Historic Tax Credit (FHTC) . . . . . . . . Equity
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounting Method
Investment
2,436 $
1,814
4,250 $
$
Commitment (1) Investment
— $
3,226
3,226 $
— $
508
508 $
Unfunded
Commitment
—
1,706
1,706
Unfunded
(1) All commitments are expected to be paid by the Company by December 31, 2019.
The following table summarizes the amortization expense and tax benefit recognized for the Company’s qualified
affordable housing projects and other tax credit investments during 2018 and 2017. There were was no tax credit benefits
recognized in 2016.
Year Ended December 31, 2018
LIHTC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
FHTC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Year Ended December 31, 2017
LIHTC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
FHTC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
310 $
3,293
3,603 $
— $
1,916
1,916 $
(346)
(3,782)
(4,128)
—
(2,225)
(2,225)
Amortization
Expense (1)
Tax Benefit
Recognized (2)
(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.
106
Bridgewater Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(dollars in thousands, except share data)
Note 16: Commitments, Contingencies and Credit Risk
Financial Instruments with Off-Balance Sheet Credit Risk
The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to
meet the financing needs of its customers. These instruments involve, to varying degrees, elements of credit risk in
excess of the amount recognized in the consolidated balance sheets.
The Company’s exposure to credit loss is represented by the contractual, or notional, amount of these
commitments. The Company follows the same credit policies in making commitments as it does for on-balance sheet
instruments. Since some of the commitments are expected to expire without being drawn upon and some of the
commitments may not be drawn upon to the total extent of the commitment, the notional amount of these commitments
does not necessarily represent future cash requirements.
The following commitments were outstanding at December 31, 2018 and December 31, 2017:
Unfunded Commitments Under Lines of Credit . . . . . . . . . . . . . . . . . $ 395,032 $ 309,513
64,546
Letters of Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 476,085 $ 374,059
81,053
December 31, December 31,
2018
2017
Commitments to extend credit are agreements to lend to a customer at fixed or variable rates as long as there is
no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. The amount of collateral obtained upon extension of credit is
based on management’s credit evaluation of the customer. Collateral held varies but may include accounts receivable;
inventory; property, plant, and equipment; real estate; and stocks and bonds. Unfunded commitments under commercial
lines of credit, home equity lines of credit, and overdraft protection agreements are commitments for possible future
extensions of credit to existing customers. These lines of credit may or may not require collateral and may or may not
contain a specific maturity date.
Standby letters of credit are conditional lending commitments issued by the Company to guarantee the
performance of a customer to a third party. Generally, all standby letters of credit issued have expiration dates within
two years. The credit risk involved in issuing standby letters of credit is essentially the same as that involved in
extending loan facilities to customers. The Company generally holds collateral supporting these commitments.
The Company had outstanding letters of credit with the FHLB in the amount of $129,152 and $63,638 at
December 31, 2018 and 2017, 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 will construct
the core and shell of a new headquarters building for the Bank in St. Louis Park, Minnesota, and the Bank will pay the
Contractor a contract price consisting of the cost of work plus a fee equal to 3.75% of the cost of work, subject to a
guaranteed maximum price of $23,000, with anticipated construction completed in 2020. As of December 31, 2018,
$1,964 has been paid under this Construction Contract.
107
Bridgewater Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(dollars in thousands, except share data)
Legal Contingencies
Various legal claims arise from time to time in the normal course of business. In the opinion of management,
any liability resulting from such proceedings would not have a material impact on the consolidated financial statements.
Note 17: Stock Options
The Company established the Bridgewater Bancshares, Inc. 2012 Combined Incentive and Non- Statutory
Stock Option Plan (the ‘‘2012 Plan’’) under which the Company may grant options to its directors, officers, and
employees for up to 750,000 shares of common stock. Both incentive stock options and nonqualified stock options may
be granted under the 2012 Plan. The exercise price of each option equals the fair market value of the Company’s stock
on the date of grant and an option’s maximum term is ten years. All outstanding options have been granted with a
vesting period of five years. As of December 31, 2018 and 2017, there were no unissued shares of the Company’s
common stock authorized for option grants under the 2012 Plan.
In 2017, the Company adopted the Bridgewater Bancshares, Inc. 2017 Combined Incentive and Non-Statutory
Stock Option Plan (the “2017 Plan”). Under the 2017 Plan, the Company may grant options to its directors, officers, 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 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 of December 31, 2018 and 2017, there were 540,000 and 664,000, respectively, of
unissued shares of the Company’s common stock authorized for option grants under the 2017 Plan.
The fair value of each option award is estimated on the date of grant using a closed form option valuation
(Black-Scholes) model that uses the assumptions noted in the table below. Expected volatilities are based on an industry
index as described below. The expected term of options granted is based on historical data and represents the period of
time that options granted are expected to be outstanding, which takes into account that the options are not transferable.
The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the
time of the grant. Historically, the Company has not paid a dividend on its common stock and does not expect to do so in
the near future.
The Company used the S&P 600 CM Bank Index as its historical volatility index. The S&P 600 CM Bank
Index is an index of publicly traded small capitalization, regional, commercial banks located throughout the United
States. There were 44 banks in the index ranging in market capitalization from $470 million up to $4.5 billion.
The weighted average assumptions used in the model for valuing stock option grants in 2018 is as follows:
Dividend Yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected Life . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected Volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk-Free Interest Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
— %
7 Years
20.48 %
2.93 %
December 31,
2018
108
Bridgewater Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(dollars in thousands, except share data)
The following table presents a summary of the status of the Company’s stock option plans for the years ended
December 31, 2018 and 2017:
December 31, 2018
December 31, 2017
Shares
Outstanding at Beginning of Year . . . . . . 1,721,000 $
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeitures . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding at End of Year . . . . . . . . . . . 1,807,100 $
135,000
(37,900)
(11,000)
Weighted
Average
Exercise Price
5.68
Shares
765,000 $
12.52 1,046,000
(90,000)
2.78
—
7.61
6.24 1,721,000 $
Weighted
Average
Exercise Price
2.79
7.47
2.01
—
5.68
Options Exercisable at End of Year . . . . .
721,100 $
4.19
419,000 $
2.83
For the years ended December 31, 2018, 2017 and 2016, the Company recognized compensation expense for
stock options of $799, $368, and $222, respectively.
The following table presents information pertaining to options outstanding at December 31, 2018:
Exercise Price
$
1.65
2.13
3.00
3.58
7.47
13.22
12.86
12.94
11.59
Totals
Options Outstanding
Options Exercisable
Number
Remaining
Number
Outstanding Contractual Life
Exercise Price Outstanding
7,500
90,000
490,000
50,000
1,039,600
25,000
45,000
35,000
25,000
1,807,100
2.8 Years $
4.3 Years
5.0 Years
6.0 Years
8.8 Years
9.4 Years
9.7 Years
9.8 Years
9.8 Years
7.5 Years $
1.65
2.13
3.00
3.58
7.47
13.22
12.86
12.94
11.59
6.24 $
7,500
90,000
386,000
30,000
207,600
—
—
—
—
721,100
As of December 31, 2018, there was $2,661 of total unrecognized compensation cost related to nonvested
share-based compensation arrangements granted under the 2017 Plan and 2012 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 year ended December 31, 2018:
Weighted
Nonvested Options at December 31, 2017 . . . . . . . . . . . . . . . . . . . . 1,302,000 $
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nonvested Options at December 31, 2018 . . . . . . . . . . . . . . . . . . . . 1,086,000 $
135,000
(340,000)
(11,000)
Shares
Number of Average Grant
Date Fair Value
2.55
3.77
2.29
2.85
2.78
109
Bridgewater Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(dollars in thousands, except share data)
Note 18: Profit Sharing Plan
The Company has a combined profit sharing 401(k) plan which provides that an annual contribution, up to
100% of the employees total pay, may be contributed to the plan. Employees are eligible to participate after meeting
certain eligibility requirements as defined in the plan and are allowed to make pre-tax contributions up to the maximum
amount allowed by the Internal Revenue Service. The terms of the 401(k) plan require employer match contributions
equal to 100% of the employee contributions up to 4% of pay. In addition, the terms of the plan allow for discretionary
contributions as determined by the Company and approved by the Board of Directors.
The employer match contributions for the 401(k) plan were $483, $304, and $320 for the years ended
December, 31, 2018, 2017 and 2016, respectively. The total employer profit sharing contributions to the plan were $328,
$250, and $237 for the years ended December, 31, 2018, 2017 and 2016, respectively.
Note 19: Deferred Compensation Plan
In 2013, the Company implemented a deferred compensation plan for certain employees which allows the
Company to make a discretionary contribution to the account of any employee designated as a participant in the plan based
upon the participant’s performance for the calendar year. Company contributions to the plan vest on the fourth anniversary
of the last day of the calendar year for which the contribution was made to the plan and accrue interest at a rate equal to
the Bank’s return on average equity for the immediately preceding calendar year. Distribution of amounts contributed
under the plan, including accrued interest, is made in a lump sum cash payment within 75 days following the date such
amounts become vested. As of December, 31, 2018 and 2017, the Company had a liability of $2,914 and $2,159,
respectively, recorded on the consolidated balance sheets.
Note 20: Regulatory Capital
Effective January 1, 2015, the capital requirements of the Company and the Bank were changed to implement
the regulatory requirements of the Basel III capital reforms. The Basel III requirements, among other things, (i) apply a
strengthened set of capital requirements to the Company and Bank, including requirements related to common equity as
a component of core capital, (ii) implement a “capital conservation buffer” against risk and higher minimum tier 1
capital requirement, and (iii) revise the rules for calculating risk-weighted assets for purposes of such requirements. The
rules made corresponding revisions to the prompt corrective action framework and include the new capital ratios and
buffer requirements which were phased in incrementally, with full implementation on January 1, 2019. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators
that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines
that involve quantitative measures of their assets, liabilities and certain off-balance sheet items as calculated under
regulatory accounting practices. The capital amounts and classifications are also subject to qualitative judgments by the
regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Company and Bank to
maintain minimum amounts and ratios (set forth in the table and defined in the regulation) 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.
110
Bridgewater Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(dollars in thousands, except share data)
The following tables present the Company and the Bank’s capital amounts and ratios as of December 31, 2018
and 2017:
Actual
For Capital Adequacy
Purposes
To be Well Capitalized
Under Prompt Corrective
Action Regulations
December 31, 2018
Amount
Ratio Amount
Ratio
Amount
Ratio
(dollars in thousands)
Company (Consolidated):
Total Risk-Based Capital . . . . . . . . . . . . . . . . $ 263,909
218,888
Tier 1 Risk-Based Capital . . . . . . . . . . . . . . .
218,888
Common Equity Tier 1 Capital . . . . . . . . . . .
218,888
Tier 1 Leverage Ratio . . . . . . . . . . . . . . . . . . .
14.55 % $ 145,111
108,833
12.07
81,625
12.07
77,971
11.23
8.00 %
6.00
4.50
4.00
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
Bank:
Total Risk-Based Capital . . . . . . . . . . . . . . . . $ 230,865
210,474
Tier 1 Risk-Based Capital . . . . . . . . . . . . . . .
210,474
Common Equity Tier 1 Capital . . . . . . . . . . .
210,474
Tier 1 Leverage Ratio . . . . . . . . . . . . . . . . . . .
12.76 % $ 144,776
108,582
11.63
81,436
11.63
77,795
10.82
8.00 % $ 180,970
144,776
6.00
117,630
4.50
97,244
4.00
10.00 %
8.00
6.50
5.00
Actual
For Capital Adequacy
Purposes
To be Well Capitalized
Under Prompt Corrective
Action Regulations
December 31, 2017
Amount
Ratio Amount
Ratio
Amount
Ratio
(dollars in thousands)
Company (Consolidated):
Total Risk-Based Capital . . . . . . . . . . . . . . . . $ 173,848
132,459
Tier 1 Risk-Based Capital . . . . . . . . . . . . . . .
132,459
Common Equity Tier 1 Capital . . . . . . . . . . .
132,459
Tier 1 Leverage Ratio . . . . . . . . . . . . . . . . . . .
12.46 % $ 111,638
83,729
62,797
63,264
9.49
9.49
8.38
8.00 %
6.00
4.50
4.00
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
Bank:
Total Risk-Based Capital . . . . . . . . . . . . . . . . $ 171,805
154,943
Tier 1 Risk-Based Capital . . . . . . . . . . . . . . .
154,943
Common Equity Tier 1 Capital . . . . . . . . . . .
154,943
Tier 1 Leverage Ratio . . . . . . . . . . . . . . . . . . .
12.37 % $ 111,134
83,351
11.15
62,513
11.15
63,060
9.83
8.00 % $ 138,918
111,134
6.00
90,297
4.50
78,825
4.00
10.00 %
8.00
6.50
5.00
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 and certain discretionary bonus
payments to executive officers. For 2018 and 2017, the capital conservation buffer was 1.875% and 1.25%, respectively.
The buffer increased incrementally each year until 2019, and the entire 2.5% capital conservation buffer is now fully
phased-in.
Management believes that, as of December 31, 2018 and 2017, the Company and the Bank’s capital ratios were
in excess of those quantitative capital ratio standards applicable on those dates, set forth under the prompt corrective
action regulations, including the capital conservation buffer described above. However, there can be no assurance that
the Company and the Bank will continue to maintain such status in the future.
Note 21: 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
111
Bridgewater Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(dollars in thousands, except share data)
levels of the hierarchy, the categorization is based on the lowest level input that is significant to the fair value
measurement. Assets and liabilities valued at fair value are categorized based on the inputs to the valuation techniques as
follows:
Level 1 – Inputs that utilized quoted prices (unadjusted) in active markets for identical assets or liabilities that
the Company has the ability to access.
Level 2 – Inputs that include quoted prices for similar assets and liabilities in active markets and inputs that are
observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial
instruments. Fair values for these instruments are estimated using pricing models, quoted prices of securities with similar
characteristics, or discounted cash flows.
Level 3 – Inputs that are unobservable for the asset or liability, which are typically based on an entity’s own
assumptions, as there is little, if any, related market activity.
Subsequent to initial recognition, the Company may re-measure the carrying value of assets and liabilities
measured on a nonrecurring basis to fair value. Adjustments to fair value usually result when certain assets are impaired.
Such assets are written down from their carrying amounts to their fair value.
Professional standards allow entities the irrevocable option to elect to measure certain financial instruments and
other items at fair value for the initial and subsequent measurement on an instrument-by-instrument basis. The Company
adopted the policy to value certain financial instruments at fair value. The Company has not elected to measure any
existing financial instruments at fair value; however, it may elect to measure newly acquired financial instruments at fair
value in the future.
Recurring Basis
The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and
to determine fair value disclosures. The following table presents the balances of the assets and liabilities measured at fair
value on a recurring basis as of December 31, 2018 and 2017:
Securities Available for Sale:
Level 1
Level 2
Level 3
Total
December 31, 2018
— $ 17,897
118,133
—
47,176
—
21,118
—
49,054
—
—
352
— $ 253,730
U.S. Treasury Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 17,897 $
Municipal Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage-Backed Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
SBA Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest Rate Swap . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
—
—
—
118,133
47,176
21,118
49,054
352
— $
Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 17,897 $ 235,833 $
112
Bridgewater Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(dollars in thousands, except share data)
Level 1 Level 2
Level 3
Total
December 31, 2017
Securities Available for Sale:
Municipal Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Mortgage-Backed Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
SBA Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest Rate Swap . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
— $ 118,320 $
—
—
—
—
— $ 229,835 $
60,681
5,107
45,383
344
— $ 118,320
60,681
—
5,107
—
45,383
—
—
344
— $ 229,835
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 Swap
Interest rate swaps are traded in over-the-counter markets where quoted market prices are not readily available.
For those interest rate swaps, fair value is determined using internally developed models of a third party that uses
primarily market observable inputs, such as yield curves and option volatilities, and accordingly are valued using Level 2
inputs.
Nonrecurring Basis
Certain assets are measured at fair value on a nonrecurring basis. These assets are not measured at fair value on
an ongoing basis; however, they are subject to fair value adjustments in certain circumstances, such as when there is
evidence of impairment or a change in the amount of previously recognized impairment.
The following tables present net impairment losses related to nonrecurring fair value measurements of certain
assets for the periods ended December 31, 2018, 2017 and 2016:
December 31, 2018
Impaired Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Level 1 Level 2 Level 3 Loss
— $ 396
— $ 396
— $ 426 $
— $ 426 $
113
Bridgewater Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(dollars in thousands, except share data)
December 31, 2017
Impaired Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Level 1 Level 2 Level 3 Loss
— $ 109
— $ 109
— $ 464 $
— $ 464 $
December 31, 2016
Impaired Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — $ 527 $
Foreclosed Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,210
Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — $ 2,737 $
Level 1 Level 2 Level 3 Loss
— $ 157
—
644
— $ 801
—
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 expense. 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.
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
114
Bridgewater Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(dollars in thousands, except share data)
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 below
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
December 31, 2018 and 2017:
Financial Assets:
December 31, 2018
Fair Value Hierarchy
Carrying
Amount
Level 1
Level 2
Estimated
Level 3 Fair Value
Cash and Due From Banks . . . . . . . . . . . . . . . . . . . . . . . . $
Bank-Owned Certificates of Deposit . . . . . . . . . . . . . . . .
Securities Available for Sale . . . . . . . . . . . . . . . . . . . . . .
FHLB Stock, at Cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans, Net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued Interest Receivable . . . . . . . . . . . . . . . . . . . . . .
Interest Rate Swap . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
28,444 $ 28,444 $
3,305
253,378
7,614
1,640,385
6,589
352
—
17,897
—
—
—
—
3,292
235,481
7,614
1,634,196
6,589
352
28,444
3,292
253,378
7,614
1,634,196
6,589
352
—
—
—
—
—
—
— $ — $
— $ 1,560,488 $ — $ 1,560,488
18,000
—
15,551
—
124,952
—
25,365
—
1,806
—
18,000
15,551
124,952
25,365
1,806
—
—
—
—
—
Financial Liabilities:
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,560,934 $
Federal Funds Purchased . . . . . . . . . . . . . . . . . . . . . . . . .
Notes Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FHLB Advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subordinated Debentures . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued Interest Payable . . . . . . . . . . . . . . . . . . . . . . . . .
18,000
15,000
124,000
24,630
1,806
115
Bridgewater Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(dollars in thousands, except share data)
December 31, 2017
Fair Value Hierarchy
Carrying
Amount
Level 1
Level 2
Estimated
Level 3 Fair Value
Financial Assets:
Cash and Due From Banks . . . . . . . . . . . . . . . . . . . . . . . . $
Bank-Owned Certificates of Deposit . . . . . . . . . . . . . . . .
Securities Available for Sale . . . . . . . . . . . . . . . . . . . . . .
FHLB Stock, at Cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans, Net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued Interest Receivable . . . . . . . . . . . . . . . . . . . . . .
Interest Rate Swap . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
23,725 $ 23,725 $
3,072
229,491
5,147
1,326,507
5,342
344
—
—
—
—
—
—
3,075
229,491
5,147
1,323,495
5,342
344
23,725
3,075
229,491
5,147
1,323,495
5,342
344
—
—
—
—
—
—
— $ — $
Financial Liabilities:
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,339,350 $
Federal Funds Purchased . . . . . . . . . . . . . . . . . . . . . . . . .
Notes Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FHLB Advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subordinated Debentures . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued Interest Payable . . . . . . . . . . . . . . . . . . . . . . . . .
23,000
17,000
68,000
24,527
1,408
— $ 1,340,109 $ — $ 1,340,109
23,000
—
17,024
—
67,282
—
25,090
—
1,408
—
23,000
17,024
67,282
25,090
1,408
—
—
—
—
—
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
debentures are estimated using a discounted cash flow analysis, based on the Company’s current incremental borrowing
rate for similar types of borrowing arrangements.
116
Bridgewater Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(dollars in thousands, except share data)
FHLB advances – The fair values of the Company’s FHLB advances are estimated using discounted cash flow
analysis based on the Company’s current incremental borrowing rates for similar types of borrowing agreements.
Accrued interest payable – The carrying amount of accrued interest payable approximates its fair value since it
is short term in nature.
Off-balance sheet instruments – Fair values of the Company’s off-balance sheet instruments (lending
commitments and unused lines of credit) are based on fees currently charged to enter into similar agreements, taking into
account the remaining terms of the agreements, the counterparties’ credit standing and discounted cash flow analysis.
The fair value of these off-balance sheet items approximates the recorded amounts of the related fees and was not
material at December 31, 2018 and 2017.
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.
117
Bridgewater Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(dollars in thousands, except share data)
Note 22: Accumulated Other Comprehensive Income (Loss)
The following table presents the components of other comprehensive income (loss) for the years ended
December 31, 2018, 2017, and 2016.
Year Ended December 31, 2018
Net Unrealized Loss on Available for Sale Securities . . . . . . . . . . . . . . . . . . . . . . . . $
Less: Reclassification Adjustment for Net Losses Included in Net Income . . . . . . .
Total Unrealized Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(3,804) $
125
(3,679)
852 $
(26)
826
(2,952)
99
(2,853)
Before Tax
Tax Effect
Net of Tax
Net Unrealized Gain on Cash Flow Hedge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Reclassification Adjustment for Gains Included in Net Income . . . . . . . . . . . .
Total Unrealized Gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9
—
9
(2)
—
(2)
7
—
7
Other Comprehensive Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
(3,670) $
824 $
(2,846)
Year Ended December 31, 2017
Net Unrealized Gain on Available for Sale Securities . . . . . . . . . . . . . . . . . . . . . . . . $
Less: Reclassification Adjustment for Net Losses Included in Net Income . . . . . . .
Total Unrealized Gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6,354 $
250
6,604
(2,236) $
(88)
(2,324)
Net Unrealized Gain on Cash Flow Hedge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Reclassification Adjustment for Gains Included in Net Income . . . . . . . . . . . .
Total Unrealized Gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
121
—
121
(42)
—
(42)
4,118
162
4,280
79
—
79
Other Comprehensive Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
6,725 $
(2,366) $
4,359
Year Ended December 31, 2016
Net Unrealized Loss on Available for Sale Securities . . . . . . . . . . . . . . . . . . . . . . . . $
Less: Reclassification Adjustment for Net Gains Included in Net Income . . . . . . . .
Total Unrealized Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(5,860) $
(830)
(6,690)
2,052 $
290
2,342
(3,808)
(540)
(4,348)
Net Unrealized Gain on Cash Flow Hedge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Reclassification Adjustment for Gains Included in Net Income . . . . . . . . . . . .
Total Unrealized Gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
223
—
223
(78)
—
(78)
145
—
145
Other Comprehensive Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
(6,467) $
2,264 $
(4,203)
118
Bridgewater Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(dollars in thousands, except share data)
The following table presents the changes in each component of accumulated other comprehensive income
(loss), net of tax, for the years ended December 31, 2018, 2017, and 2016.
Accumulated
Available For
Sale Securities Cash Flow Hedge
Other Comprehensive
Income (Loss)
1,084
194
(2,945)
99
(2,846)
(1,568)
(3,275)
4,197
162
4,359
1,084
928
(3,663)
(540)
(4,203)
(3,275)
Year Ended December 31, 2018
Balance at Beginning of Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Reclassification of the Income Tax Effects of the Tax Cuts and Jobs Act . .
Other Comprehensive Income (Loss) Before Reclassifications . . . . . . .
Amounts Reclassified from Accumulated Other Comprehensive
Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Other Comprehensive Income During Period . . . . . . . . . . . . . . . . . . . .
Balance at End of Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Year Ended December 31, 2017
Balance at Beginning of Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Other Comprehensive Income (Loss) Before Reclassifications . . . . . . .
Amounts Reclassified from Accumulated Other Comprehensive
Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Other Comprehensive Income During Period . . . . . . . . . . . . . . . . . . . .
Balance at End of Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Year Ended December 31, 2016
Balance at Beginning of Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Other Comprehensive Income (Loss) Before Reclassifications . . . . . . .
Amounts Reclassified from Accumulated Other Comprehensive
Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Other Comprehensive Income During Period . . . . . . . . . . . . . . . . . . . .
Balance at End of Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
860 $
147
224 $
47
(2,952)
7
99
(2,853)
(1,846) $
(3,420) $
4,118
162
4,280
860 $
928 $
(3,808)
(540)
(4,348)
(3,420) $
—
7
278 $
145 $
79
—
79
224 $
— $
145
—
145
145 $
119
Bridgewater Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(dollars in thousands, except share data)
Note 23: Parent Company Financial Information
The following information presents the condensed balance sheets of the Parent Company as of December 31,
2018 and 2017 and the condensed statements of income and cash flows for the years ended December 31, 2018, 2017
and 2016:
Condensed Balance Sheets
ASSETS
December 31,
2018
December 31,
2017
Cash and Cash Equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Investment in Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Premises and Equipment, Net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
45,498 $
213,676
816
1,571
15,054
160,734
2,750
1,026
$ 261,561 $ 179,564
LIABILITIES AND EQUITY
LIABILITIES
Notes Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Subordinated Debentures, Net of Issuance Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued Interest Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
15,000 $
24,630
745
188
40,563
17,000
24,527
761
114
42,402
Common Stock—$0.01 par value
SHAREHOLDERS’ EQUITY
Voting Common Stock—Authorized 75,000,000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-voting Common Stock- Authorized 10,000,000 . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional Paid-In Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained Earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated Other Comprehensive Income (Loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Shareholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Liabilities and Shareholders' Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
301
-
126,031
96,234
(1,568)
220,998
208
38
66,324
69,508
1,084
137,162
$ 261,561 $ 179,564
120
Bridgewater Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(dollars in thousands, except share data)
Condensed Statements of Income
December 31,
December 31, December 31,
2018
2017
2016
INCOME
Dividend Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
1,100 $
3
136
1,239
— $
9
145
154
EXPENSE
Interest Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Interest Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
LOSS BEFORE INCOME TAX BENEFIT AND EQUITY IN
UNDISTRIBUTED EARNINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income Tax Benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
INCOME (LOSS) BEFORE EQUITY IN UNDISTRIBUTED
2,162
1,152
3,314
(2,075)
924
1,405
555
1,960
(1,806)
713
4,500
5
50
4,555
731
297
1,028
3,527
400
EARNINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity in Undistributed Earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
(1,151)
28,071
26,920 $
(1,093)
17,982
16,889 $
3,927
9,288
13,215
Condensed Statements of Cash Flows
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to Reconcile Net Income to Net Cash Provided (Used) by
Operating Activities:
Equity in Undistributed Earnings of Subsidiaries . . . . . . . . . . . . . . . . . . .
Changes in Other Assets and Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Cash Provided (Used) by Operating Activities . . . . . . . . . . . . . . . . . . .
CASH FLOWS FROM INVESTING ACTIVITIES
Net Decrease in Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment in Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Cash Used in Investing Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from Notes Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Principal Payments on Notes Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from Issuance of Subordinated Debt . . . . . . . . . . . . . . . . . . . . . . .
Principal Payments on Subordinated Debentures . . . . . . . . . . . . . . . . . . . . .
Stock Options Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Redemption and Cancellation of Common Stock . . . . . . . . . . . . . . . . . . . . .
Net Cash Provided by Financing Activities . . . . . . . . . . . . . . . . . . . . . . .
NET CHANGE IN CASH AND CASH EQUIVALENTS . . . . . . . . . . . . . .
Cash and Cash Equivalents Beginning . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and Cash Equivalents Ending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
121
December 31,
December 31, December 31,
2018
2017
2016
$
26,920 $
16,889 $
13,215
(28,071)
(368)
(1,519)
—
(25,000)
(25,000)
(17,982)
180
(913)
—
(25,000)
(25,000)
—
(2,000)
—
—
106
58,857
—
56,963
30,444
15,054
45,498 $
—
(2,000)
24,484
—
180
—
—
22,664
(3,249)
18,303
15,054 $
(9,288)
(490)
3,437
1,761
(22,750)
(20,989)
20,000
(17,042)
—
(1,500)
100
26,046
(192)
27,412
9,860
8,443
18,303
Bridgewater Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(dollars in thousands, except share data)
Note 24: Quarterly Condensed Financial Information (Unaudited)
The following tables present the unaudited quarterly condensed financial information for the years ended
December 31, 2018 and 2017:
March 31
June 30
September 30 December 31
2018 Quarter Ended
(dollars in thousands)
Interest Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Interest Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Interest Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for Loan Losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Interest Income after Provision for Loan Losses . . . . . . .
Noninterest Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noninterest Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income Before Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision (Benefit) for Income Taxes . . . . . . . . . . . . . . . . . . . . . .
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Earnings per share
18,710 $
3,947
14,763
600
14,163
387
6,532
8,018
2,068
5,950 $
20,392 $
4,493
15,899
900
14,999
485
6,464
9,020
2,274
6,746 $
22,136 $
5,502
16,634
1,275
15,359
814
7,526
8,647
2,184
6,463 $
23,988
6,546
17,442
800
16,642
857
11,040
6,459
(1,302)
7,761
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
0.23 $
0.23 $
0.22 $
0.22 $
0.22 $
0.21 $
0.26
0.25
March 31
June 30
September 30 December 31
2017 Quarter Ended
(dollars in thousands)
Interest Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Interest Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Interest Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for Loan Losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Interest Income after Provision for Loan Losses . . . . . . .
Noninterest Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noninterest Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income Before Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision (Benefit) for Income Taxes . . . . . . . . . . . . . . . . . . . . . .
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Earnings per share
14,612 $
2,421
12,191
950
11,241
480
5,254
6,467
2,384
4,083 $
15,774 $
2,702
13,072
825
12,247
486
5,271
7,462
2,665
4,797 $
17,384 $
3,323
14,061
1,200
12,861
987
6,109
7,739
3,064
4,675 $
18,576
3,727
14,849
1,200
13,649
583
8,862
5,370
2,036
3,334
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
0.17 $
0.16 $
0.20 $
0.19 $
0.19 $
0.19 $
0.14
0.13
Note 25: Subsequent Events
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 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 Securities 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, and there is no assurance that the Company will do so.
122
Bridgewater Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(dollars in thousands, except share data)
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.
2019 Equity Incentive Plan
The Board of Directors has approved the 2019 Equity Incentive Plan, or 2019 Plan, which authorizes the
issuance of 1,000,000 shares. Adoption of the 2019 Plan is subject to shareholder approval.
123
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 9A. 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 December 31, 2018, the end of
the fiscal year covered by this Annual Report on Form 10-K. Based on that evaluation, the Chief Executive Officer and
Chief Financial Officer have concluded that, as of December 31, 2018, 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.
Evaluation of Internal Control over Financial Reporting
This annual report does not include a report of management’s assessment regarding internal control over
financial reporting or an attestation report of the Company’s independent registered public accounting firm due to a
transition period established by rules of the Securities and Exchange Commission for newly public companies.
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 Annual Report on Form 10-K that has materially affected, or is reasonably likely to materially
affect, the Company’s internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
The information called for by this item is incorporated herein by reference to the definitive Proxy Statement for
our Annual Meeting of Shareholders to be held on April 23, 2019, which will be filed with the SEC pursuant to
Regulation 14A under the Exchange Act within 120 days of the Company’s fiscal year end.
ITEM 11. EXECUTIVE COMPENSATION.
The information called for by this item is incorporated herein by reference to the definitive Proxy Statement for
our Annual Meeting of Shareholders to be held on April 23, 2019, which will be filed with the SEC pursuant to
Regulation 14A under the Exchange Act within 120 days of the Company’s fiscal year end.
124
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
Equity Compensation Plans
The following table discloses the number of outstanding options, warrants and rights granted to participants by
the Company under our equity compensation plans, as well as the number of securities remaining available for future
issuance under these plans as of December 31, 2018. The table provides this information separately for equity
compensation plans that have and have not been approved by security holders. Additional information regarding stock
incentive plans is presented in Note 17 to the Consolidated Financial Statements for the year ending December 31, 2018.
(a)
Number of
securities to be
issued upon
exercise of
outstanding
options,
warrants and
rights
(c)
Number of
securities
remaining
available for
(b)
future issuance
Weighted-
under equity
average
exercise price
compensation
of outstanding plans (excluding
options,
warrants and
rights
securities
reflected in
column (a))
540,000
—
540,000
Plan Category
Equity compensation plans approved by shareholders (1) . . . . . . . . . . . . .
Equity compensation plans not approved by shareholders . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,807,100 $
—
1,807,100 $
6.24
—
6.24
(1) Column (a) includes outstanding stock options granted from the Bridgewater Bancshares, Inc. 2017 Combined Incentive and Non-Statutory Stock
Option Plan, the Bridgewater Bancshares, Inc. 2012 Combined Incentive and Non-Statutory Stock Option Plan, and the Bridgewater Bancshares,
Inc. 2005 Combined Incentive and Non-Statutory Stock Option Plan. Column (c) reflects the remaining share reserve under the Bridgewater
Bancshares, Inc. 2017 Combined Incentive and Non-Statutory Stock Option Plan.
The information required pursuant to Item 403 of Regulation S-K can be found under the caption “Security
Ownership of Certain Beneficial Owners” in the Company’s definitive Proxy Statement on Form DEF 14A for our Annual
Meeting of Shareholders to be held on April 23, 2019, which will be filed with the SEC within 120 days of the Company’s
fiscal year end, and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE.
The information called for by this item is incorporated herein by reference to the definitive Proxy Statement for
our Annual Meeting of Shareholders to be held on April 23, 2019, which will be filed with the SEC pursuant to
Regulation 14A under the Exchange Act within 120 days of the Company’s fiscal year end.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
The information called for by this item is incorporated herein by reference to the definitive Proxy Statement for
our Annual Meeting of Shareholders to be held on April 23, 2019, which will be filed with the SEC pursuant to
Regulation 14A under the Exchange Act within 120 days of the Company’s fiscal year end.
125
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
PART IV
1. Financial Statements: See the consolidated financial statements which appear in Item 8 of this Form 10-K.
2. Financial Statement Schedules: All schedules are omitted because they are not applicable, not required, or because
the required information is included in the consolidated financial statements or notes thereto.
3. Exhibits.
Exhibit
Number
3.1
Description
Amended and Restated Articles of Incorporation of Bridgewater Bancshares, Inc. (incorporated herein by
reference to Exhibit 3.1 on Form S-1/A filed on March 5, 2018)
3.2
Amended and Restated Bylaws of Bridgewater Bancshares, Inc. (incorporated herein by reference to
Exhibit 3.2 on Form S-1/A filed on March 5, 2018)
4.1
Certain instruments defining the rights of holders of long-term debt securities of the Company and its
subsidiaries are omitted pursuant to Item 601(b)(4)(iii) of Regulation S-K. The Company hereby
undertakes to furnish to the SEC, upon request, copies of any such instruments
10.1
Employment Agreement by and among Bridgewater Bancshares, Inc., Bridgewater Bank and Jerry Baack,
dated October 1, 2017 (incorporated herein by reference to Exhibit 10.1 on Form S-1 filed on
February 16, 2018)†
10.2
10.3
Employment Agreement by and among Bridgewater Bancshares, Inc., Bridgewater Bank and Mary Jayne
Crocker, dated October 1, 2017 (incorporated herein by reference to Exhibit 10.2 on Form S-1 filed on
February 16, 2018)†
Employment Agreement by and among Bridgewater Bancshares, Inc., Bridgewater Bank and Jeffrey D.
Shellberg, dated October 1, 2017 (incorporated herein by reference to Exhibit 10.3 on Form S-1 filed on
February 16, 2018)†
10.4
Bridgewater Bank Deferred Cash Incentive Plan effective December 31, 2013 (incorporated herein by
reference to Exhibit 10.4 filed on Form S-1 on February 16, 2018)†
10.5
Bridgewater Bancshares, Inc. 2017 Combined Incentive and Non-Statutory Stock Option Plan
(incorporated herein by reference to Exhibit 10.5 on Form S-1 filed on February 16, 2018)†
10.6
Form of Stock Option Agreement under the Bridgewater Bancshares, Inc. 2017 Combined Incentive and
Non-Statutory Stock Option Plan (incorporated herein by reference to Exhibit 10.6 on Form S-1 filed on
February 16, 2018)†
10.7
Bridgewater Bancshares, Inc. 2012 Combined Incentive and Non-Statutory Stock Option Plan
(incorporated herein by reference to Exhibit 10.7 on Form S-1 filed on February 16, 2018)†
10.8
Form of Stock Option Agreement under the Bridgewater Bancshares, Inc. 2012 Combined Incentive and
Non-Statutory Stock Option Plan (incorporated herein by reference to Exhibit 10.8 on Form S-1 filed on
February 16, 2018)†
10.9
Bridgewater Bancshares, Inc. 2005 Combined Incentive and Non-Statutory Stock Option Plan
(incorporated herein by reference to Exhibit 10.9 filed on Form S-1 on February 16, 2018)†
126
10.10
Form of Incentive Stock Option Agreement under the Bridgewater Bancshares, Inc. 2005 Combined
Incentive and Non-Statutory Stock Option Plan (incorporated herein by reference to Exhibit 10.10 on
Form S-1 filed on February 16, 2018)†
10.11
Construction Contract, dated as of August 27, 2018, by and between Bridgewater Bank and Reuter
Walton Commercial, LLC (incorporated herein by reference to Exhibit 10.1 filed with the Form 8-K on
August 30, 2018)
10.12
Exchange Agreement, dated as of October 25, 2018 by and between Bridgewater Bancshares, Inc. and
Castle Creek Capital Partners V, LP (incorporated herein by reference to Exhibit 10.1 filed with the
Form 8-K on October 26, 2018)
10.13
Exchange Agreement, dated as of October 25, 2018 by and between Bridgewater Bancshares, Inc. and
EJF Sidecar Fund, Series LLC – Series E (incorporated herein by reference to Exhibit 10.2 filed with the
Form 8-K on October 26, 2018)
10.14
Exchange Agreement, dated as of October 25, 2018 by and between Bridgewater Bancshares, Inc. and
Endeavour Regional Bank Opportunities Fund II LP (incorporated herein by reference to Exhibit 10.3
filed with the Form 8-K on October 26, 2018)
21.1
Subsidiaries of Bridgewater Bancshares, Inc. (incorporated herein by reference to Exhibit 21.1 filed with
the Form S-1 on February 16, 2018)
23.1
Consent of CliftonLarsonAllen LLP
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 Annual Report on Form 10-K for the year ended
December 31, 2018, 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
________________
† Indicates a management contract or compensatory plan.
ITEM 16. FORM 10-K SUMMARY
None.
127
Pursuant to the requirements of Section 13 or 15(d) 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.
SIGNATURES
Date: March 14, 2019
Bridgewater Bancshares, Inc.
/s/ Jerry Baack
By:
Name: Jerry Baack
Title: Chairman, Chief Executive Officer and President
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature
Title
/s/ Jerry Baack
Jerry Baack
/s/ Joe Chybowski
Joe Chybowski
/s/ James S. Johnson
James S. Johnson
/s/ David B. Juan
David B. Juran
/s/ Douglas J. Parish
Douglas J. Parish
/s/ Jeffrey D. Shellberg
Jeffrey D. Shellberg
/s/ Thomas P. Trutna
Thomas P. Trutna
/s/ Todd B. Urness
Todd B. Urness
/s/ David J. Volk
David J. Volk
Chairman, Chief Executive
Officer and President
(Principal Executive Officer)
Senior Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Director
Director
Director
Director
Director
Director
Director
128
Date
March 14, 2019
March 14, 2019
March 14, 2019
March 14, 2019
March 14, 2019
March 14, 2019
March 14, 2019
March 14, 2019
March 14, 2019
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference of our report dated March 14, 2019, with respect to the
consolidated balance sheets of Bridgewater Bancshares, Inc. and Subsidiaries as of December 31,
2018 and 2017, and the related consolidated statements of income, comprehensive income,
shareholders’ equity, and cash flows for each of the years in the three-year period ended December
31, 2018, which report appears in the December 31, 2018 annual report on Form 10-K of Bridgewater
Bancshares, Inc. and Subsidiaries and in the Registration Statement of Bridgewater Bancshares, Inc.
and Subsidiaries No. 333-223770 on Form S-8.
CliftonLarsonAllen LLP
Minneapolis, Minnesota
March 14, 2019
CERTIFICATIONS REQUIRED BY
RULE 13a-14(a) OR RULE 15d-14(a)
UNDER THE SECURITIES EXCHANGE ACT OF 1934
AND SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 31.1
I, Jerry Baack, certify that:
1.
I have reviewed this annual report on Form 10-K of Bridgewater Bancshares, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of,
and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
b.
[Paragraph omitted in accordance with Exchange Act Rule 13a-14(a)];
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control
over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or
persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize
and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role
in the registrant’s internal control over financial reporting.
Date: March 14, 2019
/s/ Jerry Baack
Jerry Baack
Chairman, Chief Executive Officer and President
(Principal Executive Officer)
CERTIFICATIONS REQUIRED BY
RULE 13a-14(a) OR RULE 15d-14(a)
UNDER THE SECURITIES EXCHANGE ACT OF 1934
AND SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 31.2
I, Joe Chybowski, certify that:
1.
I have reviewed this annual report on Form 10-K of Bridgewater Bancshares, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of,
and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
b.
[Paragraph omitted in accordance with Exchange Act Rule 13a-14(a)];
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control
over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or
persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize
and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role
in the registrant’s internal control over financial reporting.
Date: March 14, 2019
/s/ Joe Chybowski
Joe Chybowski
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 32.1
In connection with the Annual Report of Bridgewater Bancshares, Inc. (the “Company”) on Form 10-K for the year ended
December 31, 2018, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Jerry
Baack, Chairman, Chief Executive Officer and President of the Company, certify, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
1. The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities
Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and
results of operations of the Company.
Dated: March 14, 2019
/s/ Jerry Baack
Jerry Baack
Chairman, Chief Executive Officer and President
(Principal Executive Officer)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 32.2
In connection with the Annual Report of Bridgewater Bancshares, Inc. (the “Company”) on Form 10-K for the year ended
December 31, 2018, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Joe
Chybowski, Senior Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
1. The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities
Exchange Act of 1934; and
2. The information contained in the Periodic Report fairly presents, in all material respects, the financial condition
and results of operations of the Company.
Dated: March 14, 2019
/s/ Joe Chybowski
Joe Chybowski
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
(This page has been left blank intentionally.)
(This page has been left blank intentionally.)
(This page has been left blank intentionally.)
LEADERSHIP Guiding the company
Board of Directors
JERRY BAACK
chairman, chief executive officer and president
james johnson
Franchise owner flagship marketing, inc., regional franchise developer at express services, inc.
david juran
Executive vice president of Dougherty & company LLC
doug parish
Former senior vice president and chief compliance officer of ameriprise financial, inc.
jeffrey shellberg
Secretary, Executive vice president and chief credit officer
thomas trutna
President and founder of big ink
todd urness
Shareholder at winthrop & weinstine, P.a.
david volk
Principal at castle creek capital
Strategic leadership team
JERRY BAACK
chairman, chief executive officer and president
joe chybowski
senior vice president and chief financial officer
mary jayne crocker
Executive vice president and chief operating officer
Nick place
senior vice president and Chief lending officer
lisa salazar
Senior vice president deposit services and emerging products
Jeffrey shellberg
secretary, Executive vice president and chief credit officer
.
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BWBMn.com | 952.893.6868
member fdic
Bridgewater
Bancshares, Inc.
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