Bridgewater Bancshares, Inc. and Subsidiaries

Consolidated Statements of Income

(dollars in thousands, except per share data)

(Unaudited)


	Three Months Ended				Six Months Ended
	June 30,		June 30,		June 30,		June 30,
	2020		2019		2020		2019
	(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)
INTEREST INCOME
Loans, Including Fees	$	25,913	$	23,321	$	51,026	$	45,500
Investment Securities		2,091		1,928		4,287		3,829
Other		162		271		321		458
Total Interest Income		28,166		25,520		55,634		49,787

INTEREST EXPENSE
Deposits		5,170		6,020		10,894		11,723
Notes Payable		111		130		226		251
FHLB Advances		1,064		827		2,091		1,602
Subordinated Debentures		479		393		872		770
Federal Funds Purchased		—		12		107		172
Total Interest Expense		6,824		7,382		14,190		14,518

NET INTEREST INCOME		21,342		18,138		41,444		35,269
Provision for Loan Losses		3,000		600		5,100		1,200

NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES		18,342		17,538		36,344		34,069

NONINTEREST INCOME
Customer Service Fees		135		189		375		380
Net Gain on Sales of Available for Sale Securities		1,361		463		1,364		458
Other Income		481		482		1,957		930
Total Noninterest Income		1,977		1,134		3,696		1,768

NONINTEREST EXPENSE
Salaries and Employee Benefits		6,348		5,124		12,802		9,926
Occupancy and Equipment		672		785		1,385		1,441
Other Expense		3,691		3,565		6,270		5,992
Total Noninterest Expense		10,711		9,474		20,457		17,359

INCOME BEFORE INCOME TAXES		9,608		9,198		19,583		18,478
Provision for Income Taxes		2,010		1,189		4,542		3,451
NET INCOME	$	7,598	$	8,009	$	15,041	$	15,027

EARNINGS PER SHARE
Basic	$	0.26	$	0.27	$	0.52	$	0.50
Diluted		0.26		0.26		0.51		0.49
Dividends Paid Per Share		—		—		—		—

See accompanying notes to consolidated financial statements.

4

Table of Contents

Bridgewater Bancshares, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income

(dollars in thousands)

(Unaudited)


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2020		2019		2020		2019
Net Income	$	7,598	$	8,009	$	15,041	$	15,027
Other Comprehensive Income (Loss):
Unrealized Gains on Available for Sale Securities		3,300		3,586		3,122		8,203
Unrealized Losses on Cash Flow Hedges		(741)		(927)		(3,673)		(1,018)
Reclassification Adjustment for Gains Realized in Income		(1,307)		(463)		(1,292)		(458)
Income Tax Impact		(263)		(461)		387		(1,411)
Total Other Comprehensive Income (Loss), Net of Tax		989		1,735		(1,456)		5,316
Comprehensive Income	$	8,587	$	9,744	$	13,585	$	20,343

See accompanying notes to consolidated financial statements.

35

Table of Contents

Bridgewater Bancshares, Inc. and Subsidiaries

Consolidated Statements of ~~Income~~Shareholders’ Equity

Three and Six Months Ended June 30, 2020 and 2019

(dollars in thousands, except ~~per~~ share data)

(Unaudited)

Three Months Ended

March 31,


2018

2017
INTEREST INCOME




Loans, Including Fees

$
17,048

$
13,192
Investment Securities

1,567

1,359
Other

95

61
Total Interest Income

18,710

14,612

INTEREST EXPENSE




Deposits

3,009

2,018
Notes Payable

152

167
FHLB Advances

299

187
Subordinated Debentures

369

—
Federal Funds Purchased

118

49
Total Interest Expense

3,947

2,421

NET INTEREST INCOME

14,763

12,191
Provision for Loan Losses

600

950

NET INTEREST INCOME AFTER




PROVISION FOR LOAN LOSSES

14,163

11,241

NONINTEREST INCOME




Customer Service Fees

170

152
Net Gain on Sales of Available for Sale Securities

—

31
Net Gain on Sales of Foreclosed Assets

4

39
Other Income

213

258
Total Noninterest Income

387

480

NONINTEREST EXPENSE




Salaries and Employee Benefits

4,318

3,168
Occupancy and Equipment

574

549
Other Expense

1,640

1,537
Total Noninterest Expense

6,532

5,254

INCOME BEFORE INCOME TAXES

8,018

6,467
Provision for Income Taxes

2,068

2,384
NET INCOME

$
5,950

$
4,083

EARNINGS PER SHARE




Basic

$
0.23

$
0.17
Diluted

0.23

0.16
Dividends Paid Per Share

—

—


								Accumulated
				Additional				Other
	Shares	Common Stock		Paid-In		Retained		Comprehensive
Three Months Ended	Voting	Voting		Capital		Earnings		Income (Loss)		Total

BALANCE March 31, 2019	30,097,674	$	301	$	126,209	$	103,252	$	2,013	$	231,775
Stock-based Compensation	—		—		173		—		—		173
Comprehensive Income	—		—		—		8,009		1,735		9,744
Stock Options Exercised	15,000		—		59		—		—		59
Stock Repurchases	(1,125,945)		(11)		(12,603)		—		—		(12,614)
BALANCE June 30, 2019	28,986,729	$	290	$	113,838	$	111,261	$	3,748	$	229,137

BALANCE March 31, 2020	28,807,375	$	288	$	110,446	$	135,080	$	2,329	$	248,143
Stock-based Compensation	7,490		—		421		—		—		421
Comprehensive Income	—		—		—		7,598		989		8,587
Stock Options Exercised	15,500		—		39		—		—		39
Issuance of Restricted Stock Awards	7,195		—		—		—		—		—
BALANCE June 30, 2020	28,837,560	$	288	$	110,906	$	142,678	$	3,318	$	257,190

								Accumulated
				Additional				Other
	Shares	Common Stock		Paid-In		Retained		Comprehensive
Six Months Ended	Voting	Voting		Capital		Earnings		Income (Loss)		Total

BALANCE December 31, 2018	30,097,274	$	301	$	126,031	$	96,234	$	(1,568)	$	220,998
Stock-based Compensation	—		—		348		—		—		348
Comprehensive Income	—		—		—		15,027		5,316		20,343
Stock Options Exercised	15,400		—		62		—		—		62
Stock Repurchases	(1,125,945)		(11)		(12,603)		—		—		(12,614)
BALANCE June 30, 2019	28,986,729	$	290	$	113,838	$	111,261	$	3,748	$	229,137

BALANCE December 31, 2019	28,973,572	$	290	$	112,093	$	127,637	$	4,774	$	244,794
Stock-based Compensation	15,211		—		822		—		—		822
Comprehensive Income (Loss)	—		—		—		15,041		(1,456)		13,585
Stock Options Exercised	15,500		—		39		—		—		39
Stock Repurchases	(177,864)		(2)		(2,048)		—		—		(2,050)
Issuance of Restricted Stock Awards	11,141		—		—		—		—		—
BALANCE June 30, 2020	28,837,560	$	288	$	110,906	$	142,678	$	3,318	$	257,190

See accompanying notes to consolidated financial statements.

46

Table of Contents

Bridgewater Bancshares, Inc. and Subsidiaries

Consolidated Statements of ~~Comprehensive Income~~Cash Flows

(dollars in thousands)

(Unaudited)

Three Months Ended

March 31,

2018

2017
Net Income

$
5,950

$
4,083
Other Comprehensive Income (Loss):

Unrealized Gains (Losses) on Available for Sale Securities

(4,147)

1,890
Unrealized Gain on Cash Flow Hedge

119

49
Reclassification Adjustment for Gains Realized in Income

—

(31)
Income Tax Impact

899

(668)
Total Other Comprehensive Income (Loss), Net of Tax

(3,129)

1,240
Comprehensive Income

$
2,821

$
5,323


	Six Months Ended
	June 30,
	2020		2019
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income	$	15,041	$	15,027
Adjustments to Reconcile Net Income to Net Cash
Provided by (Used for) Operating Activities:
Net Amortization on Securities Available for Sale		1,136		1,225
Net Gain on Sales of Securities Available for Sale		(1,364)		(458)
Provision for Loan Losses		5,100		1,200
Depreciation and Amortization of Premises and Equipment		380		417
Amortization of Other Intangible Assets		96		95
Amortization of Subordinated Debt Issuance Costs		52		51
Stock-based Compensation		822		348
Changes in Operating Assets and Liabilities:
Accrued Interest Receivable and Other Assets		(8,074)		(1,499)
Accrued Interest Payable and Other Liabilities		(12,507)		3,870
Net Cash Provided by Operating Activities		682		20,276

CASH FLOWS FROM INVESTING ACTIVITIES
(Increase) Decrease in Bank-owned Certificates of Deposit		(241)		606
Proceeds from Sales of Securities Available for Sale		34,038		40,309
Proceeds from Maturities, Paydowns, Payups and Calls of Securities Available for Sale		17,312		15,741
Purchases of Securities Available for Sale		(87,215)		(37,618)
Net Increase in Loans		(277,092)		(120,232)
Net Increase in FHLB Stock		(793)		(450)
Purchases of Premises and Equipment		(15,935)		(5,966)
Proceeds from Sales of Foreclosed Assets		134		—
Net Cash Used in Investing Activities		(329,792)		(107,610)

CASH FLOWS FROM FINANCING ACTIVITIES
Net Increase in Deposits		418,741		138,331
Net Decrease in Federal Funds Purchased		—		(18,000)
Principal Payments on Notes Payable		(1,000)		(1,000)
Proceeds from FHLB Advances		96,000		22,500
Principal Payments on FHLB Advances		(85,000)		(4,000)
Issuance of Subordinated Debt, net of Issuance Costs		48,873		—
Stock Options Exercised		39		62
Stock Repurchases		(2,050)		(12,614)
Net Cash Provided by Financing Activities		475,603		125,279

NET CHANGE IN CASH AND CASH EQUIVALENTS		146,493		37,945
Cash and Cash Equivalents Beginning		31,935		28,444
Cash and Cash Equivalents Ending	$	178,428	$	66,389

SUPPLEMENTAL CASH FLOW DISCLOSURE
Cash Paid for Interest	$	14,167	$	14,164
Cash Paid for Income Taxes		4,243		2,600
Loans Transferred to Foreclosed Assets		134		1,033
Premises and Equipment Transferred to Other Assets		121		—
Net Investment Securities Sold but Not Settled		1,433		—

See accompanying notes to consolidated financial statements.

57

Table of Contents

Bridgewater Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements ~~of Shareholders’ Equity~~

~~Three Months Ended March 31, 2018 and 2017~~

(dollars in thousands, except share data)

(Unaudited)

Accumulated

Additional

Other

Shares

Common Stock

Paid-‑In

Retained

Comprehensive


Voting

Nonvoting

Voting

Nonvoting

Capital

Earnings

Income (Loss)

Total
��

(dollars in thousands, except share data)
BALANCE December 31, 2016

20,744,001

3,845,860

$
207

$
38

$
65,777

$
52,619

$
(3,275)

$
115,366
Stock-based Compensation

—

—

—

—

53

—

—

53
Comprehensive Income

—

—

—

—

—

4,083

1,240

5,323
BALANCE March 31, 2017

20,744,001

3,845,860

$
207

$
38

$
65,830

$
56,702

$
(2,035)

$
120,742

BALANCE December 31, 2017

20,834,001

3,845,860

$
208

$
38

$
66,324

$
69,508

$
1,084

$
137,162
Stock-based Compensation

—

—

—

—

199

—

—

199
Comprehensive Income (Loss)

—

—

—

—

—

5,950

(3,129)

2,821
Issuance of Common Stock, Net of Issuance Costs

5,379,513

54

58,803

—

—

58,857
Conversion of Non-voting Stock to Voting Stock

1,022,318

(1,022,318)

10

(10)

—

—

—

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

—

—

—

—

—

(194)

194

—
BALANCE March 31, 2018

27,235,832

2,823,542

$
272

$
28

$
125,326

$
75,264

$
(1,851)

$
199,039

~~See accompanying notes to consolidated financial statements.~~

6

~~Table of Contents~~

~~Bridgewater Bancshares, Inc. and Subsidiaries~~

~~Consolidated Statements of Cash Flows~~

~~(dollars in thousands)~~

~~(Unaudited)~~

Three Months Ended

March 31,

2018

2017
CASH FLOWS FROM OPERATING ACTIVITIES

Net Income

$
5,950

$
4,083
Adjustments to Reconcile Net Income to Net Cash

Provided by Operating Activities:

Net Amortization on Securities Available for Sale

699

738
Net Gain on Sales of Securities Available for Sale

—

(31)
Provision for Loan Losses

600

950
Depreciation and Amortization of Premises and Equipment

184

175
Amortization of Other Intangible Assets

48

48
Amortization of Subordinated Debt Issuance Costs

25

—
Net Gain on Sale of Foreclosed Assets

(4)

(39)
Stock-based Compensation

199

53
Changes in Operating Assets and Liabilities:

Accrued Interest Receivable and Other Assets

(2,084)

732
Accrued Interest Payable and Other Liabilities

(1,103)

1,755
Net Cash Provided by Operating Activities

4,514

8,464

CASH FLOWS FROM INVESTING ACTIVITIES

Increase in Bank-owned Certificates of Deposit

(731)

(831)
Proceeds from Sales of Securities Available for Sale

—

565
Proceeds from Maturities, Paydowns, Payups and Calls of Securities Available for Sale

5,345

6,907
Purchases of Securities Available for Sale

(17,519)

(18,932)
Net Increase in Loans

(58,262)

(84,540)
Net (Increase) Decrease in FHLB Stock

(67)

843
Purchases of Premises and Equipment

(220)

(714)
Proceeds from Sales of Foreclosed Assets

297

1,414
Net Cash Used in Investing Activities

(71,157)

(95,288)

CASH FLOWS FROM FINANCING ACTIVITIES

Increase in Deposits

13,686

118,329
Net Decrease in Federal Funds Purchased

(14,000)

(31,000)
Principal Payments on Notes Payable

(500)

(500)
Proceeds from FHLB Advances

5,000

—
Issuance of Common Stock

58,857

—
Net Cash Provided by Financing Activities

63,043

86,829

NET CHANGE IN CASH AND CASH EQUIVALENTS

(3,600)

5
Cash and Cash Equivalents Beginning

23,725

16,499
Cash and Cash Equivalents Ending

$
20,125

$
16,504

SUPPLEMENTAL CASH FLOW DISCLOSURE

Cash Paid for Interest

$
3,828

$
2,413
Cash Paid for Income Taxes

2,150

—
Loans Transferred to Foreclosed Assets

—

689

~~See accompanying notes to consolidated financial statements.~~

7

~~Table of Contents~~

~~Bridgewater Bancshares, Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements~~

~~(dollars in thousands, except share data)~~

~~(Unaudited)~~

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

Organization

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

Bridgewater Risk Management, a subsidiary of the Company, was incorporated ~~on December 28,~~in 2016 as a ~~wholly-owned~~wholly owned insurance ~~company subsidiary of the Company.~~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.

Basis of Presentation

The accompanying unaudited consolidated financial statements were prepared in accordance with instructions for Form ~~10‑Q~~10-Q and, therefore, do not include all disclosures necessary for a complete presentation of the consolidated balance sheets, consolidated statements of income, consolidated statements of comprehensive income, consolidated statements of shareholders’ equity and consolidated statements of cash flows in conformity with U.S. generally accepted accounting principles ~~(GAAP)~~(“GAAP”). However, all normal recurring adjustments which are, in the opinion of management, necessary for the fair presentation of the interim financial statements have been included. The results of operations for the ~~three-month period~~three and six-month periods ended ~~March 31, 2018~~June 30, 2020 are not necessarily indicative of the results which may be expected for the entire year. For further information, refer to the consolidated financial statements and footnotes included in the Company’s ~~prospectus~~Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March ~~14, 2018, pursuant to Rule 424(b)(4) under the Securities Act of 1933.~~12, 2020.

Principles of Consolidation

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

Use of Estimates in Preparation of Financial Statements

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

8

Table of Contents

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

Emerging Growth Company

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

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

Paycheck Protection Program Loan Segment

8

~~Table~~The Company maintains a separate general valuation allowance for each portfolio segment. The Paycheck Protection Program, or PPP, loan segment was added by the Company in the second quarter of ~~Contents~~

2020. PPP loans are loans to businesses, sole proprietorships, independent contractors and self-employed individuals who meet certain criteria and eligibility requirements through a loan program established by the CARES Act and administered through the Small Business Administration (SBA). PPP loans generally have a two year term and earn interest at 1%. The Company believes that the primary source of repayment will be forgiveness granted by the SBA in accordance with the terms of the program. Credit risk in these loans is limited due to a full guarantee by the U.S. Government. The Company does not assign risk ratings to loans in this segment and will continue to monitor segment performance as circumstances evolve.

Impact of Recently Adopted Accounting ~~Standards~~Guidance

In ~~February 2018,~~January 2017, the Financial Accounting Standards Board, ~~(“FASB”) issued ASU 2018‑02,~~ ~~Income Statement-Reporting Comprehensive Income (Topic 220): 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 the Tax Cuts and Jobs Act. The Company elected to adopt ASU 2018-02 and, as a result, reclassified $194,000 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 Changes in Shareholders’ Equity as of and for the three months ended March 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~~or FASB, issued ASU ~~2014‑09,~~ ~~Revenue from Contracts with Customers (Topic 606)~~ (“ASU 2014‑09”). ASU 2014‑09 implements a common revenue standard that clarifies the principles for recognizing revenue. The core principle of ASU 2014‑09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract and (v) recognize revenue when (or as) the entity satisfies a performance obligation. ASU 2015‑14, ~~Revenue from Contracts with Customers (Topic 606)~~ (“ASU 2015‑14”) was issued in August 2015 which defers adoption to annual reporting periods beginning after December 15, 2018 and interim reporting periods beginning after December 15, 2019. The timing of the Company’s revenue recognition is not expected to materially change. The Company’s largest portions of revenue, interest and fees on loans and gain on sales of 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 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. This guidance is effective for fiscal years beginning after December 15, 2019 and interim reporting periods beginning after December 15, 2020. The Company is currently evaluating the impact of the adoption of ASU 2016‑02 to determine the potential impact it will have on its consolidated financial statements. 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

9

~~Table of Contents~~

~~material to the Company’s results of operations. The Company is evaluating the impact this new standard will have on its consolidated financial statements.~~

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

~~In June 2016, the FASB issued ASU 2016‑13,~~ ~~Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.~~ 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 beginning after December 15, 2020 and interim reporting periods beginning after December 15, 2021.

All entities may adopt the amendments in the ASU early as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Amendments should be applied using a modified retrospective transition method by means of a cumulative-effect adjustment to equity as of the beginning of the period in which the guidance is adopted. The Company is evaluating the impact this new standard will have on its consolidated financial statements.

~~In January 2017, the FASB issued ASU 2017‑03,~~ ~~Accounting Changes and Error Corrections (Topic 250) and Investments – Equity Method and Joint Ventures (Topic 323).~~ The amendments in the ASU add and amend SEC paragraphs pursuant to the SEC staff announcement at the September 22, 2016 and November 17, 2016, Emerging Issues Task Force (EITF) meetings. The September announcement is about the disclosure of the impact that recently issued accounting standards will have on the financial statements of a registrant when such standards are adopted in a future period. The announcement applies to ASU 2014‑09, ~~Revenue from Contracts with Customers (Topic 606); ASU 2016‑02,~~ ~~Leases (Topic 842); and ASU 2016‑13,~~ ~~Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments~~ and to any subsequent amendments to these ASUs that are issued prior to their adoption. The November announcement made amendments to conform the SEC Observer comment on accounting for tax benefits resulting from investments in qualified affordable housing projects to the guidance issued in Accounting Standards Update No. 2014‑01, ~~Investments-Equity Method and Joint Ventures (Topic 323); Accounting for Investments in Qualified Affordable Housing Projects.~~ ~~This ASU is intended to improve transparency and is effective upon issuance. The adoption of this ASU is not anticipated to have a material impact on the Company’s consolidated financial~~

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~~statements other than to enhance the disclosures on the effects of new accounting pronouncements as they move closer to adoption in future periods.~~

~~In January 2017, the FASB issued ASU 2017‑04,~~ 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The amendments in this accounting standards update, or ASU, were issued to address concerns over the cost and complexity of the two-step goodwill impairment test and resulted in the removal of the second step of the test. The amendments require an entity to apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit’s carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The new guidance does not amend the optional qualitative assessment of goodwill impairment. ~~This ASU is intended to reduce~~The Company adopted the ~~cost and complexity~~accounting standard during the first quarter 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. 2020. The adoption of ~~this guidance is~~the standard did not ~~expected to~~ have a ~~significant~~material impact on the Company’s consolidated financial statements. The Company’s policy is to test goodwill for impairment annually or on an interim basis if an event triggering impairment may have occurred. The economic turmoil and market volatility resulting from the COVID-19 pandemic resulted in a substantial decrease in the Company’s stock price and market capitalization. The Company believed such decrease was a triggering event requiring an interim goodwill impairment analysis as of March

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31, 2020. Under the new simplified guidance, the Company’s estimated fair value to a market participant as of March 31, 2020, exceeded its carrying amount resulting in no impairment charge for the period.

In ~~March 2017,~~August 2018, the FASB issued ASU ~~2017‑08,~~ ~~Receivables~~2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – ~~Nonrefundable Fees and Other Costs (Subtopic 310‑20): Premium Amortization on Purchased Callable Debt Securities.~~ Changes to the Disclosure Requirements for Fair Value Measurement. The amendments inof this ASU ~~shorten~~modify the ~~amortization period~~disclosure requirements for fair value measurements by removing, modifying, or adding certain ~~callable debt securities held at a premium. Specifically,~~disclosures. The Company adopted this standard during the ~~amendments require~~first quarter of 2020 and 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~~standard did not ~~expected to~~ have a ~~significant~~material impact on the Company’s consolidated financial statements.

In ~~May 2017,~~August 2018, the FASB issued ASU ~~2017‑09, Compensation- Stock Compensation (Topic 718)~~2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40). The amendments in this ASU ~~provide clarity about which changes~~align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). Implementation costs incurred in the application development stage are capitalized depending on the nature of the costs, while costs incurred during the preliminary project and post implementation stages are expensed as the activities are performed. The amendment also requires entities to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement and in the same income statement line item as the fees associated with the hosting element. The Company adopted the accounting standard during the first quarter of 2020. The adoption of the standard did not have a material impact on the Company’s consolidated financial statements.

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

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

(i)

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

(ii)

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

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

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Impact of Recently Issued Accounting Standards

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

In January 2020, the FASB issued ASU 2020-01, Investments – Equity Securities (Topic 321), Investments – Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815): Clarifying the Interactions between Topic 321, Topic 323 and Topic 815. This ASU clarifies that an entity should consider observable transactions that require it to either apply ~~modification accounting.~~or discontinue the equity method of accounting for the purposes of applying the fair value measurement alternative. The ASU iswill be effective ~~for all entities~~ for fiscal years, ~~beginning after December 15, 2017, including~~and interim periods within those fiscal years, ~~with early adoption permitted. The Company is evaluating the impact this new standard will have on its 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 does not expect adoption to have a material impact on the consolidated financial statements.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships and other transactions that reference the London Interbank Offered Rate, or LIBOR, or another reference rate expected to be discontinued, if certain criteria are met. LIBOR is used as an index rate for the Company’s interest-rate swaps, subordinated debt, various investment securities, and approximately 8.5% of the Company’s loans as of June 30, 2020.

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

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The new topic supersedes Topic 840, Leases, and increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and requires disclosures of key information about leasing arrangements. In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, which provides narrow amendments to clarify how to apply certain aspects of the new lease standard, ~~with have~~and ASU 2018-11, Leases: Targeted Improvements, which was issued to provide relief to companies from restating comparative periods. Pursuant to this ASU, in the period of adoption the Company will not restate comparative periods presented in its condensed financial statements. The effective date of this guidance for public companies is for reporting periods beginning after December 15, 2018. In June 2020, the FASB issued ASU 2020-05, which delays the adoption for ASU 2016-02 for non-public entities to fiscal years beginning after December 15, 2021, and interim periods beginning after December 15, 2022. As an emerging growth company as defined in the JOBS Act, the Company has elected to delay adoption of this ASU until January 1, 2022. The Company continues to assess and implement changes to its accounting processes for leases to help ensure that it meets the reporting and disclosure requirements of this ASU. The Company’s assets and liabilities will increase based on ~~its~~the present value of the remaining lease payments for leases in place at the adoption date; however, this is not expected to be material to the Company’s consolidated financial statements.

Subsequent Events

Subsequent events have been evaluated through August 6, 2020, which is the date the consolidated financial statements were available to be issued.

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Note 2: Earnings Per Share

Basic earnings per common share are computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted earnings per common share are calculated by dividing net income by the weighted average number of shares adjusted for the dilutive effect of stock ~~options. The dilutive effect was computed using~~compensation. For the ~~treasury stock method, which assumes the~~three and six months ended June 30, 2020, stock options and restricted stock awards of approximately 561,000 and 560,000, respectively, were ~~exercised and the hypothetical proceeds~~excluded from the ~~exercise~~calculation because their effect would have been anti-dilutive. For the three and six months ended June 30, 2019, stock options of approximately 135,000 were ~~used by~~excluded from the ~~Company to purchase common stock at the average market price during the period.~~calculation because their effect would have been anti-dilutive.

The following table presents the numerators and denominators for basic and diluted earnings per share computations for the three and six months ended ~~March 31, 2018~~June 30, 2020 and ~~2017:~~

March 31,

March 31,

2018

2017
Net Income Available to Common Shareholders

$
5,950

$
4,083
Weighted Average Common Stock Outstanding:

Weighted Average Common Stock Outstanding (Basic)

25,755,764

24,589,861
Stock Options

415,669

208,892
Weighted Average Common Stock Outstanding (Dilutive)

26,171,433

24,798,753

Basic Earnings per Common Share

$
0.23

$
0.17
Diluted Earnings per Common Share

0.23

0.16

2019:


	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2020			2019		2020		2019
Net Income Available to Common Shareholders	$	7,598		$	8,009	$	15,041	$	15,027
Weighted Average Common Stock Outstanding:
Weighted Average Common Stock Outstanding (Basic)		28,676,441	��		29,703,024		28,733,968		29,899,241
Dilutive Effect of Stock Compensation		488,716			609,015		616,458		610,939
Weighted Average Common Stock Outstanding (Dilutive)		29,165,157			30,312,039		29,350,426		30,510,180

Basic Earnings per Common Share	$	0.26		$	0.27	$	0.52	$	0.50
Diluted Earnings per Common Share		0.26			0.26		0.51		0.49

Note 3: Securities

The following tables present the amortized cost and estimated fair value of securities with gross unrealized gains and losses at ~~March 31, 2018~~June 30, 2020 and December 31, ~~2017:~~2019:


	March 31, 2018
			Gross		Gross
	Amortized		Unrealized		Unrealized
	Cost		Gains		Losses		Fair Value

									June 30, 2020
											Gross		Gross
									Amortized		Unrealized		Unrealized
									Cost		Gains		Losses		Fair Value
Securities Available for Sale:
Municipal Bonds	$	120,457	$	1,185	$	(1,705)	$	119,937	$	93,780	$	7,705	$	(763)	$	100,722
Mortgage-Backed Securities		63,073		27		(2,074)		61,026		92,800		2,159		(335)		94,624
Corporate Securities		7,019		74		(19)		7,074		55,258		898		(526)		55,630
SBA Securities		49,076		172		(466)		48,782		44,599		19		(564)		44,054
Asset-Backed Securities										31,437		367		(539)		31,265
Total Securities Available for Sale	$	239,625	$	1,458	$	(4,264)	$	236,819	$	317,874	$	11,148	$	(2,727)	$	326,295


	December 31, 2017
			Gross		Gross
	Amortized		Unrealized		Unrealized
	Cost		Gains		Losses		Fair Value

									December 31, 2019
											Gross		Gross
									Amortized		Unrealized		Unrealized
									Cost		Gains		Losses		Fair Value
Securities Available for Sale:
U.S. Treasury Securities									$	4,990	$	8	$	—	$	4,998
Municipal Bonds	$	115,784	$	3,005	$	(469)	$	118,320		99,441		6,338		(36)		105,743
Mortgage-Backed Securities		61,945		11		(1,275)		60,681		64,312		697		(281)		64,728
Corporate Securities		5,052		80		(25)		5,107		49,674		633		(131)		50,176
SBA Securities		45,368		242		(227)		45,383		50,126		35		(602)		49,559
Asset-Backed Securities										14,673		—		—		14,673
Total Securities Available for Sale	$	228,149	$	3,338	$	(1,996)	$	229,491	$	283,216	$	7,711	$	(1,050)	$	289,877

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The following ~~table shows~~tables present the fair value and gross unrealized losses of securities with unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss ~~position:~~position at June 30, 2020 and December 31, 2019:


	Less Than 12 Months				12 Months or Greater				Total
			Unrealized				Unrealized				Unrealized
	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
March 31, 2018

														Less Than 12 Months				12 Months or Greater				Total
																Unrealized				Unrealized				Unrealized
														Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
June 30, 2020													June 30, 2020
Municipal Bonds	$	47,304	$	(884)	$	20,596	$	(821)	$	67,900	$	(1,705)		$	15,521	$	(756)	$	223	$	(7)	$	15,744	$	(763)
Mortgage-Backed Securities		20,005		(395)		38,635		(1,679)		58,640		(2,074)			31,775		(299)		13,102		(36)		44,877		(335)
Corporate Securities		968		—		2,031		(19)		2,999		(19)			20,692		(526)		—		—		20,692		(526)
SBA Securities		25,419		(405)		3,717		(61)		29,136		(466)			13,061		(106)		27,121		(458)		40,182		(564)
Asset-Backed Securities															17,003		(539)		—		—		17,003		(539)
Total Securities Available for Sale	$	93,696	$	(1,684)	$	64,979	$	(2,580)	$	158,675	$	(4,264)		$	98,052	$	(2,226)	$	40,446	$	(501)	$	138,498	$	(2,727)


	Less Than 12 Months				12 Months or Greater				Total
			Unrealized				Unrealized				Unrealized
	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
December 31, 2017

														Less Than 12 Months				12 Months or Greater				Total
																Unrealized				Unrealized				Unrealized
														Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
December 31, 2019													December 31, 2019
Municipal Bonds	$	15,043	$	(89)	$	21,111	$	(380)	$	36,154	$	(469)		$	2,760	$	(23)	$	1,390	$	(13)	$	4,150	$	(36)
Mortgage-Backed Securities		16,046		(105)		41,800		(1,170)		57,846		(1,275)			32,276		(242)		3,098		(39)		35,374		(281)
Corporate Securities		—		—		2,028		(25)		2,028		(25)			8,350		(131)		—		—		8,350		(131)
SBA Securities		15,634		(189)		3,775		(38)		19,409		(227)			11,907		(64)		31,036		(538)		42,943		(602)
Total Securities Available for Sale	$	46,723	$	(383)	$	68,714	$	(1,613)	$	115,437	$	(1,996)		$	55,293	$	(460)	$	35,524	$	(590)	$	90,817	$	(1,050)

At ~~March 31, 2018, 199~~June 30, 2020, 167 debt securities had unrealized losses with aggregate depreciation of approximately 2%1.9% from the Company’s amortized cost basis. At December 31, ~~2017, 133~~2019, 110 debt securities had unrealized losses with aggregate depreciation of approximately 1%1.1% from the Company’s amortized cost basis. These unrealized losses ~~relate~~related principally to changes in interest rates and ~~are~~were not due to changes in the financial condition of the issuer, the quality of any underlying assets, or applicable credit enhancements. In analyzing whether unrealized losses on debt securities are other than temporary, management considers whether the securities are issued by a government body or agency, whether a rating agency has downgraded the securities, industry analysts’ reports, the financial condition and performance of the issuer, and the quality of any underlying assets or credit enhancements. Since management has the ability and intent to hold these debt securities for the foreseeable future, no declines were deemed to be other than temporary as of ~~March 31, 2018.~~June 30, 2020.

The following ispresents a summary of amortized cost and estimated fair value of debt securities by the lesser of expected call date or contractual maturity as of ~~March 31, 2018.~~June 30, 2020. Call date is used when a call of the debt security is expected, determined by the Company when the security has a market value above its amortized cost. Contractual maturities will differ from expected maturities for mortgage-backed, SBA securities and ~~SBA~~asset-backed securities because borrowers may have the right to call or prepay obligations without penalties.


March 31, 2018	Amortized Cost		Fair Value

June 30, 2020					Amortized Cost		Fair Value
Due in One Year or Less	$	2,030	$	2,033	$	2,680	$	2,699
Due After One Year Through Five Years		14,388		14,515		44,248		45,376
Due After Five Years Through 10 Years		50,242		50,399		85,119		89,275
Due After 10 Years		60,816		60,064		16,991		19,002
Subtotal		127,476		127,011		149,038		156,352
Mortgage-Backed Securities		63,073		61,026		92,800		94,624
SBA Securities		49,076		48,782		44,599		44,054
Asset-Backed Securities						31,437		31,265
Totals	$	239,625	$	236,819	$	317,874	$	326,295

As of ~~March 31, 2018, the amortized cost~~June 30, 2020 and ~~fair value of securities pledged to secure public deposits and for other purposes required or permitted by law were $64,413 and $64,288, respectively. As of~~ December 31, ~~2017,~~2019, 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.~~

portfolio was unencumbered.

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The following istable presents a summary of the proceeds from sales of securities available for sale, as well as gross gains and losses, for the three and six months ended ~~March 31, 2018~~June 30, 2020 and ~~2017:~~2019:


	Three Months Ended
	March 31,
	2018		2017

					Three Months Ended				Six Months Ended
					June 30,				June 30,
					2020		2019		2020		2019
Proceeds From Sales of Securities	$	—	$	565	$	31,936	$	32,159	$	34,038	$	40,309
Gross Gains on Sales		—		31		1,435		640		1,438		716
Gross Losses on Sales		—		—		(74)		(177)		(74)		(258)

Note 4: Loans

The following table presents the components of ~~loans~~the loan portfolio at ~~March 31, 2018~~June 30, 2020 and December 31, ~~2017:~~2019:


	March 31,		December 31,
	2018		2017

					June 30,		December 31,
					2020		2019
Commercial	$	199,262	$	217,753	$	302,536	$	276,035
Paycheck Protection Program						180,228		—
Construction and Land Development		147,842		130,586		191,768		196,776
Real Estate Mortgage:
1-4 Family Mortgage		200,573		195,707		289,456		260,611
Multifamily		332,770		317,872		522,491		515,014
CRE Owner Occupied		67,512		65,909		73,539		66,584
CRE Non-owner Occupied		453,498		415,034		627,651		592,545
Total Real Estate Mortgage Loans		1,054,353		994,522		1,513,137		1,434,754
Consumer and Other		3,963		4,252		6,109		4,473
Total Loans, Gross		1,405,420		1,347,113		2,193,778		1,912,038
Allowance for Loan Losses						(27,633)		(22,526)
Net Deferred Loan Fees		(4,130)		(4,104)		(10,287)		(5,512)
Allowance for Loan Losses		(17,121)		(16,502)
Total Loans, Net	$	1,384,169	$	1,326,507	$	2,155,858	$	1,884,000

The following table presents the activity in the allowance for loan losses, by segment, for the three months ended ~~March 31, 2018~~June 30, 2020 and ~~2017:~~2019:


			Construction						CRE		CRE
			and Land		1-‑4 Family				Owner		Non‑owner		Consumer
Three Months Ended March 31, 2018	Commercial		Development		Mortgage		Multifamily		Occupied		Occupied		and Other		Unallocated		Total

																					Paycheck		Construction						CRE		CRE
																					Protection		and Land		1--4 Family				Owner		Non-owner		Consumer
Three Months Ended June 30, 2020																			Commercial		Program		Development		Mortgage		Multifamily		Occupied		Occupied		and Other		Unallocated		Total
Allowance for Loan Losses:
Beginning Balance	$	2,435	$	1,892	$	2,317	$	3,170	$	956	$	5,087	$	60	$	585	$	16,502	$	3,557	$	—	$	2,131	$	3,202	$	6,556	$	938	$	8,003	$	92	$	106	$	24,585
Provision for Loan Losses		(230)		(127)		91		306		(42)		320		1		281		600		1,633		90		42		74		141		26		320		82		592		3,000
Loans Charged-off		—		—		—		—		—		—		(12)		—		(12)		—		—		—		—		—		—		—		(1)		—		(1)
Recoveries of Loans		20		—		10		—		—		—		1		—		31		2		—		—		46		—		—		—		1		—		49
Total Ending Allowance Balance		2,225		1,765		2,418		3,476		914		5,407		50		866		17,121	$	5,192	$	90	$	2,173	$	3,322	$	6,697	$	964	$	8,323	$	174	$	698	$	27,633

Three Months Ended March 31, 2017

Three Months Ended June 30, 2019
Allowance for Loan Losses:
Beginning Balance	$	1,315	$	1,379	$	2,410	$	1,568	$	1,160	$	3,323	$	78	$	1,100	$	12,333	$	3,361	$	—	$	2,097	$	2,611	$	4,715	$	790	$	6,349	$	61	$	623	$	20,607
Provision for Loan Losses		122		168		(13)		485		53		411		1		(277)		950		(181)		—		148		63		279		54		136		5		96		600
Loans Charged-off		(1)		—		—		—		—		(74)		(5)		—		(80)		—		—		—		—		—		—		—		(3)		—		(3)
Recoveries of Loans		1		2		10		—		—		—		—		—		13		1		—		1		153		—		—		—		3		—		158
Total Ending Allowance Balance		1,437		1,549		2,407		2,053		1,213		3,660		74		823		13,216	$	3,181	$	—	$	2,246	$	2,827	$	4,994	$	844	$	6,485	$	66	$	719	$	21,362

14

Table of Contents

The following table presents the activity in the allowance for loan losses, by segment, for the six months ended June 30, 2020 and 2019:


			Paycheck		Construction						CRE		CRE
			Protection		and Land		1--4 Family				Owner		Non-owner		Consumer
Six Months Ended June 30, 2020	Commercial		Program		Development		Mortgage		Multifamily		Occupied		Occupied		and Other		Unallocated		Total
Allowance for Loan Losses:
Beginning Balance	$	3,058	$	—	$	2,202	$	2,839	$	5,824	$	792	$	6,972	$	85	$	754	$	22,526
Provision for Loan Losses		2,164		90		(29)		435		873		172		1,351		100		(56)		5,100
Loans Charged-off		(34)		—		—		—		—		—		—		(14)		—		(48)
Recoveries of Loans		4		—		—		48		—		—		—		3		—		55
Total Ending Allowance Balance	$	5,192	$	90	$	2,173	$	3,322	$	6,697	$	964	$	8,323	$	174	$	698	$	27,633

Six Months Ended June 30, 2019
Allowance for Loan Losses:
Beginning Balance	$	2,898	$	—	$	2,451	$	2,597	$	4,644	$	808	$	5,872	$	65	$	696	$	20,031
Provision for Loan Losses		299		—		(206)		68		350		36		613		17		23		1,200
Loans Charged-off		(19)		—		—		—		—		—		—		(20)		—		(39)
Recoveries of Loans		3		—		1		162		—		—		—		4		—		170
Total Ending Allowance Balance	$	3,181	$	—	$	2,246	$	2,827	$	4,994	$	844	$	6,485	$	66	$	719	$	21,362

The following tables present the balance in the allowance for loan losses and the recorded investment in loans, by segment, based on impairment method as of ~~March 31, 2018~~June 30, 2020 and December 31, ~~2017:~~2019:


			Paycheck		Construction						CRE		CRE
			Protection		and Land		1--4 Family				Owner		Non-owner		Consumer
Allowance for Loan Losses at June 30, 2020	Commercial		Program		Development		Mortgage		Multifamily		Occupied		Occupied		and Other		Unallocated		Total
Individually Evaluated for Impairment	$	34	$	—	$	—	$	—	$	—	$	—	$	—	$	33	$	—	$	67
Collectively Evaluated for Impairment		5,158		90		2,173		3,322		6,697		964		8,323		141		698		27,566
Totals	$	5,192	$	90	$	2,173	$	3,322	$	6,697	$	964	$	8,323	$	174	$	698	$	27,633

Allowance for Loan Losses at December 31, 2019
Individually Evaluated for Impairment	$	31	$	—	$	—	$	—	$	—	$	—	$	—	$	14	$	—	$	45
Collectively Evaluated for Impairment		3,027		—		2,202		2,839		5,824		792		6,972		71		754		22,481
Totals	$	3,058	$	—	$	2,202	$	2,839	$	5,824	$	792	$	6,972	$	85	$	754	$	22,526


			Paycheck		Construction						CRE		CRE
			Protection		and Land		1--4 Family				Owner		Non-owner		Consumer
Loans at June 30, 2020	Commercial		Program		Development		Mortgage		Multifamily		Occupied		Occupied		and Other		Total
Individually Evaluated for Impairment	$	254	$	—	$	164	$	1,229	$	—	$	1,840	$	220	$	33	$	3,740
Collectively Evaluated for Impairment		302,282		180,228		191,604		288,227		522,491		71,699		627,431		6,076		2,190,038
Totals	$	302,536	$	180,228	$	191,768	$	289,456	$	522,491	$	73,539	$	627,651	$	6,109	$	2,193,778

Loans at December 31, 2019
Individually Evaluated for Impairment	$	273	$	—	$	176	$	1,059	$	—	$	236	$	—	$	14	$	1,758
Collectively Evaluated for Impairment		275,762		—		196,600		259,552		515,014		66,348		592,545		4,459		1,910,280
Totals	$	276,035	$	—	$	196,776	$	260,611	$	515,014	$	66,584	$	592,545	$	4,473	$	1,912,038

Construction

CRE

CRE

and Land

1‑4 Family

Owner

Non‑owner

Consumer

Allowance for Loan Losses at March 31, 2018

Commercial

Development

Mortgage

Multifamily

Occupied

Occupied

and Other

Unallocated

Total
Individually Evaluated for Impairment

$
14

$
—

$
49

$
8

$
23

$
—

$
—

$
—

$
94
Collectively Evaluated for Impairment

2,211

1,765

2,369

3,468

891

5,407

50

866

17,027
Totals

$
2,225

$
1,765

$
2,418

$
3,476

$
914

$
5,407

$
50

$
866

$
17,121

Allowance for Loan Losses at December 31, 2017

Individually Evaluated for Impairment

$
14

$
—

$
57

$
14

$
24

$
—

$
—

$
—

$
109
Collectively Evaluated for Impairment

2,421

1,892

2,260

3,156

932

5,087

60

585

16,393
Totals

$
2,435

$
1,892

$
2,317

$
3,170

$
956

$
5,087

$
60

$
585

$
16,502

15

Table of Contents

Construction

CRE

CRE

and Land

1‑4 Family

Owner

Non‑owner

Consumer

Loans at March 31, 2018

Commercial

Development

Mortgage

Multifamily

Occupied

Occupied

and Other

Total
Individually Evaluated for Impairment

$
14

$
575

$
1,920

$
65

$
674

$
—

$
70

$
3,318
Collectively Evaluated for Impairment

199,248

147,267

198,653

332,705

66,838

453,498

3,893

1,402,102
Totals

$
199,262

$
147,842

$
200,573

$
332,770

$
67,512

$
453,498

$
3,963

$
1,405,420

Loans at December 31, 2017

Individually Evaluated for Impairment

$
14

$
583

$
1,693

$
66

$
2,165

$
—

$
75

$
4,596
Collectively Evaluated for Impairment

217,739

130,003

194,014

317,806

63,744

415,034

4,177

1,342,517
Totals

$
217,753

$
130,586

$
195,707

$
317,872

$
65,909

$
415,034

$
4,252

$
1,347,113

The following ~~tables present~~table presents information regarding total carrying amounts and total unpaid principal balances of impaired loans by loan segment as of ~~and for the periods ended, March 31, 2018~~June 30, 2020 and December 31, ~~2017:~~2019:


	March 31, 2018
	Recorded		Principal		Related		Average		Interest
	Investment		Balance		Allowance		Investment		Recognized

											June 30, 2020						December 31, 2019
											Recorded		Principal		Related		Recorded		Principal		Related
											Investment		Balance		Allowance		Investment		Balance		Allowance
Loans With No Related Allowance for Loan Losses:
Commercial											$	145	$	145	$	—	$	167	$	167	$	—
Construction and Land Development	$	575	$	827	$	—	$	579	$	—		164		773		—		176		785		—
Real Estate Mortgage:
HELOC and 1-4 Family Junior Mortgage		494		506		—		508		3		305		492		—		302		489		—
1st REM - 1-4 Family		122		122		—		124		—
1st REM - Rentals		1,107		1,107		—		1,113		13		924		924		—		757		757		—
CRE Owner Occupied		516		516		—		524		7		1,840		1,840		—		236		236		—
CRE Non Owner Occupied												220		220		—		—		—		—
Totals												3,598		4,394		—		1,638		2,434		—

Loans With An Allowance for Loan Losses:
Commercial												109		111		34		106		109		31
Consumer and Other		70		87		—		72		—		33		33		33		14		14		14
Totals		2,884		3,165		—		2,920		23		142		144		67		120		123		45

Loans With An Allowance for Loan Losses:
Commercial		14		14		14		14		—
Real Estate Mortgage:
LOCs and 2nd REM - Rentals		64		64		46		64		1
1st REM - Rentals		133		133		3		134		1
Multifamily		65		65		8		65		1
CRE Owner Occupied		158		158		23		159		2
Totals		434		434		94		436		5
Grand Totals	$	3,318	$	3,599	$	94	$	3,356	$	28	$	3,740	$	4,538	$	67	$	1,758	$	2,557	$	45

The following table presents information regarding the average balances and interest income recognized on impaired loans by loan segment for the three and six months ended June 30, 2020 and 2019:



	Three Months Ended June 30,								Six Months Ended June 30,
	2020				2019				2020				2019
	Average		Interest		Average		Interest		Average		Interest		Average		Interest
	Investment		Recognized		Investment		Recognized		Investment		Recognized		Investment		Recognized
Loans With No Related Allowance for Loan Losses:
Commercial	$	150	$	3	$	552	$	8	$	156	$	5	$	565	$	16
Construction and Land Development		168		—		2,796		87		172		—		2,899		87
Real Estate Mortgage:
HELOC and 1-4 Family Junior Mortgage		329		—		156		2		329		—		156		4
1st REM - 1-4 Family		—		—		617		12		—		—		617		12
1st REM - Rentals		926		11		635		9		929		22		1,451		18
CRE Owner Occupied		1,844		25		434		6		1,840		50		441		13
CRE Non Owner Occupied		222		3		—		—		224		6		—		—
Consumer and Other		—		—		54		—		—		—		55		—
Totals		3,639		42		5,244		124		3,650		83		6,184		150

Loans With An Allowance for Loan Losses:
Commercial		109		—		137		2		110		1		137		2
Real Estate Mortgage:
HELOC and 1-4 Family Junior Mortgage		—		—		305		—		—		—		306		—
1st REM - Rentals		—		—		—		—		—		—		191		—
Consumer and Other		34		1		—		—		34		1		—		—
		143		1		442		2		144		2		634		2
Grand Totals	$	3,782	$	43	$	5,686	$	126	$	3,794	$	85	$	6,818	$	152

Table of Contents

The following table presents a summary of closed loan modifications made in response to the COVID-19 pandemic, by loan segment and modification type, as of June 30, 2020:


	Interest-Only			Payment Deferral			Total
	Amount		# of Loans	Amount		# of Loans	Amount		# of Loans
Commercial	$	17,615	36	$	13,355	14	$	30,970	50
Construction and Land Development		133	1		—	—		133	1
Real Estate Mortgage:
1 - 4 Family Mortgage		8,037	22		420	2		8,457	24
Multifamily		41,320	6		16,251	3		57,571	9
CRE Owner Occupied		7,397	14		1,502	3		8,899	17
CRE Nonowner Occupied		100,805	41		86,175	18		186,980	59
Consumer and Other		—	—		—	—		—	—
Totals	$	175,307	120	$	117,703	40	$	293,010	160

Note 5: Premises and Equipment

Premises and equipment are summarized as follows as of June 30, 2020 and December 31, 2019:


	Range of	June 30,		December 31,
	Useful Lives	2020		2019
Land	N/A	$	5,174	$	5,174
Building	15 - 39 Years		3,486		3,487
Leasehold Improvements	3 ‑ 10 Years		3,344		3,344
Furniture and Equipment	3 ‑ 5 Years		5,184		3,902
Construction in Progress	N/A		31,157		16,693
Subtotal			48,345		32,600
Accumulated Depreciation			(5,283)		(4,972)
Totals		$	43,062	$	27,628

Depreciation and amortization expense charged to noninterest expense for the three months ended ~~March 31, 2018.~~June 30, 2020 and 2019 totaled $193 and $207, respectively. Depreciation and amortization expense charged to noninterest expense for the six months ended June 30, 2020 and 2019 totaled $380 and $417, respectively. Construction in progress represents amounts paid for the construction of the Company’s new corporate headquarters building. Construction is expected to be completed in the third quarter of 2020.

Note 5:6: Deposits

The following table presents the composition of deposits at ~~March 31, 2018~~June 30, 2020 and December 31, ~~2017:~~2019:


	March 31,		December 31,
	2018		2017

					June 30,		December 31,
					2020		2019
Transaction Deposits	$	479,935	$	469,831	$	934,255	$	712,136
Savings and Money Market Deposits		339,541		369,942		516,543		516,785
Time Deposits						382,187		360,027
Brokered Deposits		228,817		207,481		409,066		234,362
Time Deposits		304,743		292,096
Totals	$	1,353,036	$	1,339,350	$	2,242,051	$	1,823,310

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Table of Contents

Note 7: Derivative Instruments and Hedging Activities

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

Non-hedge Derivatives

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

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

The following table presents a summary of the Company’s interest rate swaps to facilitate customer transactions as of June 30, 2020 and December 31, 2019:


	June 30, 2020				December 31, 2019
	Notional		Estimated		Notional		Estimated
	Amount		Fair Value		Amount		Fair Value
Interest Rate Swap Agreements:
Assets	$	49,983	$	3,749	$	7,140	$	150
Liabilities		49,983		(3,749)		7,140		(150)
Total	$	99,966	$	—	$	14,280	$	—

Cash Flow Hedging Derivatives

For derivative instruments that are designated and qualify as a cash flow hedge, the aggregate fair value of the derivative instrument is recorded in other assets or other liabilities with any gain or loss related to changes in fair value recorded in accumulated other comprehensive income, net of tax. The gain or loss is reclassified into earnings in the same period during which the hedged asset or liability affects earnings and is presented in the same income statement line item as the earnings effect of the hedged asset or liability. The Company utilizes cash flow hedges to manage interest rate exposure for the brokered certificate of deposit, wholesale borrowing, and notes payable portfolios. During the next 12 months, the Company estimates that $796 will be reclassified to interest expense.

The following tables present a summary of the Company’s interest rate swaps designated as cash flow hedges as of June 30, 2020 and December 31, 2019:


	June 30, 2020			December 31, 2019
Notional Amount	$	107,000		$	48,000
Weighted Average Pay Rate		1.30	%		1.89	%
Weighted Average Receive Rate		1.05	%		2.25	%
Weighted Average Maturity (Years)		4.29			3.53
Net Unrealized Loss	$	(4,220)		$	(618)

20

Table of Contents


	June 30, 2020				December 31, 2019
	Notional		Estimated		Notional		Estimated
	Amount		Fair Value		Amount		Fair Value
Interest Rate Swap Agreements:
Assets	$	—	$	—	$	18,000	$	134
Liabilities		107,000		(4,220)		30,000		(752)

The following table presents the effect of derivative instruments in cash flow hedging relationships on the consolidated statements of income for the six months ended June 30, 2020 and 2019:


		Six Months Ended June 30,
(dollars in thousands)		2020			2019
Derivatives in	Location of Gain or	Gain (Loss)
Cash Flow Hedging	(Loss) Reclassified	Reclassified from
Relationships	from AOCI into Income	AOCI into Earnings
Interest Rate Swaps	Interest Expense		$	(72)		$	—

NaN amounts were reclassified from accumulated other comprehensive income into net income related to hedge ineffectiveness for these derivatives during the three and six months ended June 30, 2020 and 2019, and 0 amounts are expected to be reclassified from accumulated other comprehensive income into net income related to hedge ineffectiveness over the next twelve months.

Note 6:8: Subordinated Debentures

On ~~July 12, 2017,~~June 19, 2020, the Company entered into a Subordinated Note Purchase Agreement with certain institutional accredited investors ~~(the “Purchasers”) whereby~~and qualified institutional buyers pursuant to which the Company sold and issued ~~$25,000~~$50,000 in aggregate principal amount of ~~fixed-to-floating subordinated notes~~5.25% Fixed-to-Floating Rate Subordinated Notes due ~~2027~~2030 (the ~~“Notes”~~“2030 Notes”). The 2030 Notes were issued by the Company to the ~~Purchasers~~purchasers at a price equal to 100% of their face amount. Issuance costs were ~~$516~~$1,127 and have been netted against ~~Subordinated Debt~~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~~1, 2025. There was 0 amortization expense ~~for~~relating to the ~~three months ended March 31, 2018 was $25, with $448 remaining to be amortized~~2030 Notes as of ~~March 31, 2018.~~June 30, 2020.

The 2030 Notes mature on July ~~15, 2027,~~1, 2030, with a fixed ~~interest~~ rate of ~~5.875%~~5.25% payable ~~semiannually in arrears~~semi-annually for five years until July ~~15, 2022.~~1, 2025. Thereafter, the ~~Company will be obligated~~interest rate converts to ~~pay~~a variable interest ~~at a~~ rate equal to ~~3‑month LIBOR~~the three-month term Secured Overnight Financing Rate, or SOFR, plus ~~388~~513 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 1, 2025, 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 2030 Notes being redeemed, including any accrued and unpaid interest thereon.

On July 12, 2017, the Company entered into a Subordinated Note Purchase Agreement with certain institutional accredited investors whereby the Company sold and issued $25,000 in aggregate principal amount of 5.875% Fixed-to-Floating Rate Subordinated Notes due 2027 (the “2027 Notes”). The 2027 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 three months and six months ended June 30, 2020, was $26 and $52, respectively, with $215 remaining to be amortized as of June 30, 2020.

21

Table of Contents

The 2027 Notes mature on July 15, 2027, with a fixed interest rate of 5.875% payable semi-annually 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 2027 Notes are not convertible into or exchangeable for any other securities or assets of the Company or any of its subsidiaries. The 2027 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 2027 Notes being redeemed, including any accrued and unpaid interest thereon.

Note 7:9: Tax Credit Investments

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

The following table presents the Company’s investments in qualified affordable housing projects and other tax credit investments at June 30, 2020 and December 31, 2019:


		June 30, 2020				December 31, 2019
Investment	Accounting Method		Investment		Unfunded Commitment ⁽¹⁾		Investment		Unfunded Commitment
Low Income Housing Tax Credit (LIHTC)	Proportional Amortization	$	2,007	$	—	$	2,148	$	—
Federal Historic Tax Credit (FHTC)	Equity		2,490		3,405		2,262		3,395
Total		$	4,497	$	3,405	$	4,410	$	3,395

(1)

All commitments are expected to be paid by the Company by June 30, 2021.

The following table presents the amortization expense and tax benefit recognized for the Company’s qualified affordable housing projects and other tax credit investments for the three and six months ended June 30, 2020 and 2019:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2020		2019		2020		2019
Amortization Expense⁽¹⁾
LIHTC	$	70	$	72	$	141	$	144
FHTC		362		1,390		447		1,567
Total	$	432	$	1,462	$	588	$	1,711
Tax Benefit Recognized⁽²⁾
LIHTC	$	(82)	$	(83)	$	(165)	$	(165)
FHTC		(447)		(1,684)		(617)		(1,898)
Total	$	(529)	$	(1,767)	$	(782)	$	(2,063)

(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.

22

Table of Contents

Note 10: Commitments, Contingencies and Credit Risk

Financial Instruments with Off-Balance Sheet Credit Risk

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

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

18

~~Table of Contents~~

The following commitments were outstanding at ~~March 31, 2018~~June 30, 2020 and December 31, ~~2017:~~2019:


	March 31,		December 31,
	2018		2017

					June 30,		December 31,
					2020		2019
Unfunded Commitments Under Lines of Credit	$	344,424	$	309,513	$	492,373	$	500,962
Letters of Credit		69,082		64,546		82,677		79,225
Totals	$	413,506	$	374,059	$	575,050	$	580,187

The Company had outstanding letters of credit with the FHLB in total amounts of $94,469 and $108,502 at June 30, 2020 and December 31, 2019, respectively, on behalf of customers and to secure public deposits.

On August 27, 2018, the Bank and Reuter Walton Commercial, LLC (the “Contractor”) entered into a Standard Form of Agreement Between Owner and Contractor and the corresponding General Conditions of the Contract for Construction (collectively, the “Construction Contract”). Under the Construction Contract, the Contractor is constructing the core and shell of a new headquarters building for the Bank in St. Louis Park, Minnesota, and the Bank will pay the Contractor a contract price consisting of the cost of work plus a fee equal to 3.75% of the cost of work, subject to a guaranteed maximum price of $23,000, with anticipated construction completed in the third quarter of 2020. As of June 30, 2020, $22,906 had been paid under this Construction Contract. On December 3, 2019, the Bank entered into a separate contract with a third party relating to the construction of the build-out of the new headquarters building for the Bank. The total amount to be paid by the Bank under the contract is $6,321, with construction anticipated to be completed in the third quarter of 2020. As of June 30, 2020, $4,975 had been paid under this contract.

Legal Contingencies

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

Note 8:11: Stock Options and Restricted Stock Awards

The Company established the Bridgewater Bancshares, Inc. 2012 Combined Incentive and Non-Statutory Stock Option Plan (the “2012 Plan”) under which the Company may grant options to its directors, officers, employees, and consultants for up to 750,000 shares of common stock. Both incentive stock options and nonqualified stock options may be granted under the 2012 Plan. The exercise price of each option equals the fair market value of the Company’s stock on the date of grant and the maximum term of each outstanding option is ten years. All outstanding options have been granted with vesting periods of five years. As of June 30, 2020 and December 31, 2019, there were 0 remaining shares of the Company’s common stock reserved for future option grants under the 2012 Plan.

23

Table of Contents

In 2017, the Company ~~approved~~adopted the Bridgewater Bancshares, Inc. 2017 Combined Incentive and Non-Statutory Stock Option Plan (the “2017 Plan”). Under the 2017 Plan, the Company may grant options to its directors, officers, employees and ~~employees~~consultants for up to 1,500,000 shares of common stock. Both incentive stock options and nonqualified stock options may be granted under the 2017 Plan. The exercise price of each option equals the ~~estimated~~fair market value of the Company’s stock on the date of grant and ~~an option’s~~the maximum term of each outstanding option is ten ~~years and a~~years. All outstanding options have been granted with vesting ~~period~~periods offour or five years. As of ~~March~~June 30, 2020 and December 31, ~~2018,~~2019, there were ~~659,000 of unissued~~310,600 remaining shares of the Company’s common stock ~~authorized~~reserved for future option grants under the 2017 Plan. ~~Subsequent to March 31, 2018,~~

In 2019, the Company adopted the Bridgewater Bancshares, Inc. 2019 Equity Incentive Plan (the “2019 EIP”). The types of awards which may be granted ~~25,000~~under the 2019 EIP include incentive and nonqualified stock ~~options.~~options, stock appreciation rights, stock awards, restricted stock units, restricted stock and cash incentive awards. The Company may grant these awards to its directors, officers, employees and certain other service providers for up to 1,000,000 shares of common stock. The exercise price of each option equals the fair market value of the Company’s stock on the date of grant and the maximum term of each award is ten years. All outstanding awards have been granted with a vesting period of four years. As of June 30, 2020 and December 31, 2019, there were 780,688 and 867,040 of remaining shares of the Company’s common stock reserved for future grants under the 2019 EIP.

Stock Options

The fair value of each option award is estimated on the date of grant using a closed form option valuation (Black-Scholes) model that uses the assumptions noted in the table below. Expected volatilities are based on an industry index as described below. The expected term of options granted is based on historical data and represents the period of time that options granted are expected to be outstanding, which takes into account that the options are not transferable. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of the grant. Historically, the Company has not paid a dividend on its common ~~share~~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 3654 banks in the index ranging in market capitalization from ~~$395~~$500 million up to ~~$3.5~~$4.5 billion.

The weighted average assumptions used in the model for valuing stock option grants for the six months ended June 30, 2020, are as follows:


	June 30,
	~~March 31,~~ 2020
	~~2018~~
Dividend Yield	—	%
Expected Life	107	Years
Expected Volatility	~~21.86~~44.14	%
Risk-Free Interest Rate	~~2.72~~0.68	%

1924

Table of Contents

The following table presents a summary of the status of the Company’s stock option ~~plans~~grants for the six months ended June 30, 2020:


	June 30, 2020
		Weighted
		Average
	Shares	Exercise Price
Outstanding at Beginning of Year	1,961,650	$	7.08
Granted	60,000		10.61
Exercised	(15,500)		2.55
Forfeitures	—		—
Outstanding at Period End	2,006,150	$	7.22

Options Exercisable at Period End	993,550	$	5.09

For the three months ended ~~March 31, 2018:~~

March 31, 2018




Weighted

Average

Shares

Exercise Price
Outstanding at Beginning of Year

1,721,000

$
5.68
Granted

5,000

7.78
Exercised

—

—
Forfeitures

—

—
Outstanding at Period End

1,726,000

$
5.68

Options Exercisable at Period End

533,000

$
2.88

Weighted-Average Value of Options Granted During the Period

5,000

$
2.91

~~The~~June 30, 2020 and 2019, the Company recognized ~~$199 and $53 in~~ compensation expense for stock options ~~for~~of $230 and $174, respectively. For the ~~three~~six months ended ~~March 31, 2018~~June 30, 2020 and ~~2017,~~2019, the Company recognized compensation expense for stock options of $448 and $348, respectively.

The following table presents information pertaining to options outstanding at ~~March 31, 2018:~~June 30, 2020:


		Options Outstanding					Options Exercisable
		Number	Remaining				Number

										Options Outstanding			Options Exercisable
										Number	Remaining				Number
Exercise Price	Exercise Price	Outstanding	Contractual Life		Exercise Price		Outstanding		Exercise Price	Outstanding	Contractual Life		Exercise Price		Outstanding
$	1.65	15,000	3.6	Years	$	1.65		15,000	2.13	66,750	2.8	Years	$	2.13		66,750
	2.13	90,000	5.0	Years		2.13		72,000
	3.00	520,000	5.8	Years		3.00		416,000
	3.58	50,000	6.8	Years		3.58		30,000
	7.47	1,046,000	9.5	Years		7.47		—
	7.78	5,000	9.8	Years		7.78		—
	Totals	1,726,000	8.0	Years	$	5.68	$	533,000
									3.00	447,500	3.5	Years		3.00		447,500
									3.58	45,000	4.5	Years		3.58		45,000
									7.47	1,023,900	7.3	Years		7.47		402,300
									13.22	25,000	7.9	Years		13.22		10,000
									12.86	45,000	8.2	Years		12.86		9,000
									12.94	30,000	8.3	Years		12.94		6,000
									11.59	25,000	8.3	Years		11.59		5,000
									11.15	10,000	8.7	Years		11.15		2,000
									11.13	50,000	9.2	Years		11.13		—
									12.92	178,000	9.4	Years		12.92		—
									12.67	25,000	9.7	Years		12.67		—
									8.76	25,000	9.8	Years		8.76		—
									10.08	10,000	9.9	Years		10.08		—
									Totals	2,006,150	6.6	Years	$	7.22		993,550

As of ~~March 31, 2018,~~June 30, 2020, there was ~~$2,801~~$2,553 of total unrecognized compensation cost related to nonvested ~~share-based compensation arrangements~~stock options granted under the 2012 Plan, 2017 Plan and 2019 EIP that is expected to be recognized over a weighted-average period of 4.8 years.

25

Table of Contents

The following presents an analysis of nonvested stock options issued and outstanding for the six months ended June 30, 2020:


		Weighted
	Number of	Average Grant
	Shares	Date Fair Value
Nonvested Options at December 31, 2019	969,600	$	3.08
Granted	60,000		4.39
Vested	(17,000)		2.61
Forfeited	—		—
Nonvested Options at June 30, 2020	1,012,600	$	3.16

Restricted Stock Awards

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

The following table presents an analysis of nonvested restricted stock awards outstanding for the six months ended June 30, 2020:


		Weighted
	Number of	Average Grant
	Shares	Date Fair Value
Nonvested Awards at December 31, 2019	132,960	$	12.92
Granted	11,141		10.32
Vested	—		—
Forfeited	—		—
Nonvested Awards at June 30, 2020	144,101	$	12.72

Compensation expense associated with the restricted stock awards is recognized on a straight-line basis over the period that the restrictions associated with the awards lapse based on the total cost of the award at the grant date. For the three and six months ended June 30, 2020, the Company recognized compensation expense for restricted stock awards of $113 and $221, respectively. NaN compensation expense was recognized for restricted stock awards for the three and six months ended June 30, 2019.

As of June 30, 2020, there was $1,582 of total unrecognized compensation cost related to nonvested restricted stock awards granted under the 2019 EIP that is expected to be recognized over a period of ~~five~~four years.

~~The following is an analysis of nonvested options to purchase~~In addition, during the six months ended June 30, 2020, the Company issued 15,211 shares of common stock to directors as a part of their compensation for their annual services on the Company’s board of directors. The aggregate value of the shares issued to directors of $152 is included in stock ~~issued and outstanding for~~based compensation expense in the ~~three months ended March 31, 2018:~~accompanying consolidated statements of shareholders’ equity.

Weighted

Number of

Average Grant

Shares

Date Fair Value
Nonvested Options at December 31, 2017

1,302,000

$
2.55
Granted

5,000

2.91
Vested

(114,000)

1.57
Forfeited

—

—
Nonvested Options at March 31, 2018

1,193,000

$
2.65

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Table of Contents

Note 9:12: 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 ~~will be~~were phased in incrementally, with full implementation ~~scheduled for~~on January 1, 2019. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve qualitative measures of their assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and ~~classification~~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~~tables below and defined in the ~~regulation)~~regulations) of Total Capital to Risk Weighted Assets, Tier 1 Capital to Risk Weighted Assets, Common Equity Tier 1 Capital to Risk Weighted Assets, and Tier 1 Capital to ~~average assets.~~Average Assets.

The following tables present the Company and the Bank’s capital amounts and ratios as of ~~March 31, 2018~~June 30, 2020 and December 31, ~~2017:~~2019:


																	Minimum Required				For Capital Adequacy				To be Well Capitalized
																	For Capital Adequacy				Purposes Plus Capital				Under Prompt Corrective
													Actual				Purposes				Conservation Buffer				Action Regulations
June 30, 2020													Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio

									To be Well Capitalized
					For Capital Adequacy				Under Prompt Corrective
	Actual				Purposes				Action Regulations
March 31, 2018	Amount		Ratio		Amount		Ratio		Amount		Ratio
	(dollars in thousands)
													(dollars in thousands)
Company (Consolidated):
Total Risk-Based Capital	$	239,102	16.22	%	$	117,960	8.00	%		N/A	N/A		$	351,627	15.99	%	$	175,889	8.00	%	$	230,854	10.50	%		N/A	N/A
Tier 1 Risk-Based Capital		197,069	13.37			88,470	6.00			N/A	N/A			250,480	11.39			131,917	6.00			186,882	8.50			N/A	N/A
Common Equity Tier 1 Capital		197,069	13.37			66,353	4.50			N/A	N/A			250,480	11.39			98,937	4.50			153,903	7.00			N/A	N/A
Leverage Ratio		197,069	12.15			64,891	4.00			N/A	N/A
Tier 1 Leverage Ratio														250,480	9.94			100,750	4.00			100,750	4.00			N/A	N/A
Bank:
Total Risk-Based Capital	$	203,526	13.86	%	$	117,451	8.00	%	$	146,813	10.00	%	$	312,358	14.21	%	$	175,816	8.00	%	$	230,759	10.50	%	$	219,770	10.00	%
Tier 1 Risk-Based Capital		186,045	12.67			88,088	6.00			117,451	8.00			284,880	12.96			131,862	6.00			186,805	8.50			175,816	8.00
Common Equity Tier 1 Capital		186,045	12.67			66,066	4.50			95,429	6.50			284,880	12.96			98,897	4.50			153,839	7.00			142,851	6.50
Leverage Ratio		186,045	11.51			64,630	4.00			80,788	5.00
Tier 1 Leverage Ratio														284,880	11.36			100,289	4.00			100,289	4.00			125,361	5.00

To be Well Capitalized

For Capital Adequacy

Under Prompt Corrective

Actual

Purposes

Action Regulations

December 31, 2017

Amount

Ratio

Amount

Ratio

Amount

Ratio

(dollars in thousands)

Company (Consolidated):

Total Risk-Based Capital

$
173,848

12.46
%
$
111,638

8.00
%

N/A

N/A

Tier 1 Risk-Based Capital

132,459

9.49

83,729

6.00

N/A

N/A

Common Equity Tier 1 Capital

132,459

9.49

62,797

4.50

N/A

N/A

Leverage Ratio

132,459

8.38

63,264

4.00

N/A

N/A

Bank:

Total Risk-Based Capital

$
171,805

12.37
%
$
111,134

8.00
%
$
138,918

10.00
%
Tier 1 Risk-Based Capital

154,943

11.15

83,351

6.00

111,134

8.00

Common Equity Tier 1 Capital

154,943

11.15

62,513

4.50

90,297

6.50

Leverage Ratio

154,943

9.83

63,060

4.00

78,825

5.00

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Table of Contents


					Minimum Required				For Capital Adequacy				To be Well Capitalized
					For Capital Adequacy				Purposes Plus Capital				Under Prompt Corrective
	Actual				Purposes				Conservation Buffer				Action Regulations
December 31, 2019	Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio

	(dollars in thousands)
Company (Consolidated):
Total Risk-Based Capital	$	269,613	12.98	%	$	166,163	8.00	%	$	218,089	10.50	%		N/A	N/A
Tier 1 Risk-Based Capital		236,533	11.39			124,623	6.00			176,549	8.50			N/A	N/A
Common Equity Tier 1 Capital		236,533	11.39			93,467	4.50			145,393	7.00			N/A	N/A
Tier 1 Leverage Ratio		236,533	10.69			88,498	4.00			88,498	4.00			N/A	N/A
Bank:
Total Risk-Based Capital	$	252,501	12.16	%	$	166,137	8.00	%	$	218,055	10.50	%	$	207,671	10.00	%
Tier 1 Risk-Based Capital		243,461	11.72			124,603	6.00			176,521	8.50			166,137	8.00
Common Equity Tier 1 Capital		243,461	11.72			93,452	4.50			145,370	7.00			134,986	6.50
Tier 1 Leverage Ratio		243,461	11.01			88,455	4.00			88,455	4.00			110,569	5.00

The Company and the Bank must maintain a capital conservation buffer, as defined by Basel III regulatory capital guidelines, in order to avoid limitations on capital distributions, including dividend payments, stock repurchases and certain discretionary bonus payments to executive officers. ~~For 2018~~

Note 13: Stock Repurchase Program

On January 22, 2019, the Company adopted a stock repurchase program. Under the repurchase program, the Company may repurchase up to $15.0 million of its common stock during the 24-month period beginning on January 22, 2019. The stock repurchase program permits the Company’s management to acquire shares of the Company’s common stock from time to time in the open market in accordance with Rule 10b-18 of the Exchange Act or in privately negotiated transactions at prices management considers to be attractive and ~~2017,~~in the ~~capital conservation buffer is 1.875%~~best interests of the Company and ~~1.25%, respectively.~~its shareholders. The ~~buffer will increase incrementally each year until 2019 when~~stock repurchase program does not obligate the ~~entire 2.5% capital conservation buffer~~Company to repurchase shares of its common stock.

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

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

During the three and six months ended June 30, 2020, the Company repurchased -0- and 177,864 shares of its common stock, respectively, representing less than 1% of the Company’s outstanding shares. Shares were repurchased at a weighted average price of $11.52 for a total of $2.0 million. All shares repurchased under the stock repurchase program were converted to authorized but unissued shares. At June 30, 2020, the remaining amount that could be used to repurchase shares under the stock repurchase program was $8.0 million. Although the stock repurchase program remains in place, the Company has not repurchased any shares since March 16, 2020. The Company remains committed to maintaining strong capital levels and will consider the current economic environment and the uncertainty of the long-term impact of the COVID-19 pandemic when evaluating its future utilization of the stock repurchase program. Management currently does not expect to begin repurchasing shares again until the effects of the COVID-19 pandemic have subsided.

Note ~~10:~~14: 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

28

Table of Contents

unobservable inputs (Level 3). If the inputs used in the determination of the fair value measurement fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the fair value measurement. Assets and liabilities valued at fair value are categorized based on the inputs to the valuation techniques as follows:

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

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

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

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

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

Recurring Basis

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The following ~~table presents~~tables present the balances of the assets and liabilities measured at fair value on a recurring basis as of ~~March 31, 2018~~June 30, 2020 and December 31, ~~2017:~~2019:


	March 31, 2018
	Level 1		Level 2		Level 3		Total

									June 30, 2020
									Level 1		Level 2		Level 3		Total
Fair Value of Financial Assets:
Securities Available for Sale:
Municipal Bonds	$	—	$	119,937	$	—	$	119,937	$	—	$	100,722	$	—	$	100,722
Mortgage-Backed Securities		—		61,026		—		61,026		—		94,624		—		94,624
Corporate Securities		—		7,074		—		7,074		—		55,630		—		55,630
SBA Securities		—		48,782		—		48,782		—		44,054		—		44,054
Interest Rate Swap		—		463		—		463
Totals	$	—	$	237,282	$	—	$	237,282
Asset-Backed Securities										—		31,265		—		31,265
Interest Rate Swaps										—		3,749		—		3,749
Total Fair Value of Financial Assets									$	—	$	330,044	$	—	$	330,044
Fair Value of Financial Liabilities:
Interest Rate Swaps									$	—	$	7,969	$	—	$	7,969
Total Fair Value of Financial Liabilities									$	—	$	7,969	$	—	$	7,969

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Table of Contents

December 31, 2017


Level 1

Level 2

Level 3

Total
Securities Available for Sale:

Municipal Bonds

$
—

$
118,320

$
—

$
118,320
Mortgage-Backed Securities

—

60,681

—

60,681
Corporate Securities

—

5,107

—

5,107
SBA Securities

—

45,383

—

45,383
Interest Rate Swap

—

344

—

344
Totals

$
—

$
229,835

$
—

$
229,835


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

Investment Securities

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

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

Interest Rate ~~Swap~~Swaps

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

Nonrecurring Basis

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

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The following tables present net impairment losses related to nonrecurring fair value measurements of certain assets ~~for the periods ended March 31, 2018~~at June 30, 2020 and December 31, ~~2017:~~2019:


	March 31, 2018
	Level 1		Level 2		Level 3		Loss

									June 30, 2020
									Level 1		Level 2		Level 3		Loss
Impaired Loans	$	—	$	340	$	—	$	94	$	—	$	75	$	—	$	67
Totals	$	—	$	340	$	—	$	94	$	—	$	75	$	—	$	67


	December 31, 2017
	Level 1		Level 2		Level 3		Loss

									December 31, 2019
									Level 1		Level 2		Level 3		Loss
Impaired Loans	$	—	$	464	$	—	$	109	$	—	$	75	$	—	$	206
Totals	$	—	$	464	$	—	$	109	$	—	$	75	$	—	$	206

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Impaired Loans

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

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

Fair Value

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

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

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The following tables present the carrying amount and estimated fair values of financial instruments at ~~March 31, 2018~~June 30, 2020 and December 31, ~~2017:~~2019:


	March 31, 2018
			Fair Value Hierarchy
	Carrying								Estimated
	Amount		Level 1		Level 2		Level 3		Fair Value

											June 30, 2020
													Fair Value Hierarchy
											Carrying								Estimated
											Amount		Level 1		Level 2		Level 3		Fair Value
Financial Assets:
Cash and Due From Banks	$	20,125	$	20,125	$	—	$	—	$	20,125	$	178,428	$	178,428	$	—	$	—	$	178,428
Bank-Owned Certificates of Deposit		3,803		—		3,803		—		3,803		2,895		—		2,967		—		2,967
Securities Available for Sale		236,819		—		236,819		—		236,819		326,295		—		326,295		—		326,295
FHLB Stock, at Cost		5,214		—		5,214		—		5,214		8,617		—		8,617		—		8,617
Loans, Net		1,384,169		—		1,374,676		—		1,374,676		2,155,858		—		2,195,310				2,195,310
Accrued Interest Receivable		5,753		—		5,753		—		5,753		8,267		—		8,267		—		8,267
Interest Rate Swap		463		—		463		—		463

Interest Rate Swaps												3,749		—		3,749		—		3,749

Financial Liabilities:
Deposits	$	1,353,036	$	—	$	1,352,094	$	—	$	1,352,094	$	2,242,051	$	—	$	2,254,352	$	—	$	2,254,352
Federal Funds Purchased		9,000		—		9,000		—		9,000
Notes Payable		16,500		—		16,523		—		16,523		12,000		—		12,001		—		12,001
FHLB Advances		73,000		—		71,807		—		71,807		147,500		—		154,519		—		154,519
Subordinated Debentures		24,552		—		24,433		—		24,433		73,658		—		74,840		—		74,840
Accrued Interest Payable		1,085		—		1,085		—		1,085		1,953		—		1,953		—		1,953
Interest Rate Swaps												7,969		—		7,969		—		7,969


	December 31, 2017
			Fair Value Hierarchy
	Carrying								Estimated
	Amount		Level 1		Level 2		Level 3		Fair Value

											December 31, 2019
													Fair Value Hierarchy
											Carrying								Estimated
											Amount		Level 1		Level 2		Level 3		Fair Value
Financial Assets:
Cash and Due From Banks	$	23,725	$	23,725	$	—	$	—	$	23,725	$	31,935	$	31,935	$	—	$	—	$	31,935
Bank-Owned Certificates of Deposit		3,072		—		3,075		—		3,075		2,654		—		2,677		—		2,677
Securities Available for Sale		229,491		—		229,491		—		229,491		289,877		4,998		284,879		—		289,877
FHLB Stock, at Cost		5,147		—		5,147		—		5,147		7,824		—		7,824		—		7,824
Loans, Net		1,326,507		—		1,323,495		—		1,323,495		1,884,000		—		1,891,987		—		1,891,987
Accrued Interest Receivable		5,342		—		5,342		—		5,342		6,775		—		6,775		—		6,775
Interest Rate Swap		344		—		344		—		344

Interest Rate Swaps												284		—		284		—		284

Financial Liabilities:
Deposits	$	1,339,350	$	—	$	1,340,109	$	—	$	1,340,109	$	1,823,310	$	—	$	1,821,915	$	—	$	1,821,915
Federal Funds Purchased		23,000		—		23,000		—		23,000
Notes Payable		17,000		—		17,024		—		17,024		13,000		—		13,022		—		13,022
FHLB Advances		68,000		—		67,282		—		67,282		136,500		—		141,152		—		141,152
Subordinated Debentures		24,527		—		25,090		—		25,090		24,733		—		25,309		—		25,309
Accrued Interest Payable		1,408		—		1,408		—		1,408		1,982		—		1,982		—		1,982
Interest Rate Swaps												902		—		902		—		902

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

Cash and ~~cash equivalents~~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.

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

FHLB advances – The fair values of the Company’s FHLB ~~Advances~~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~~Off-balance sheet instruments – Fair values of the Company’s ~~off-balance-sheet~~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 iswas not material at ~~March 31, 2018~~June 30, 2020 and December 31, ~~2017.~~2019.

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

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

General

The following discussion explains the Company’s financial condition and results of operations as of and for the three and six months ended ~~March 31, 2018.~~June 30, 2020. Annualized results for ~~this~~these interim ~~period~~periods may not be indicative of results for the full year or future periods. The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes presented elsewhere in this report and the Company’s ~~prospectus~~Annual Report on Form 10-K for the year ended December 31, 2019, filed with the Securities and Exchange Commission, or the SEC, on March ~~14, 2018, pursuant to Rule 424(b)(4) under the Securities Act of 1933.~~12, 2020.

Forward-Looking Statements

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

·

●

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

●

loan concentrations in our portfolio;

·

●

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

·

●

~~our~~the ability to successfully manage credit risk;

·

●

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

·

●

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

·

●

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

~~our high~~●

the concentration of large loans to certain borrowers;

·

●

~~our~~the ability to successfully manage liquidity risk;

·

●

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

·

●

the concentration of large deposits from certain clients;

~~our~~●

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

·

●

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

·

●

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

●

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

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·

●

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

·

●

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

·

●

competition in the financial services industry;

·

●

severe weather, natural disasters, wide spread disease or pandemics (including the COVID-19 pandemic), acts of war or terrorism or other adverse external events;

●

the effectiveness of our risk management framework;

·

●

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

·

●

the impact of recent and future legislative and regulatory changes;

·

●

interest rate risk;

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~~Table of Contents~~

·

●

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

·

●

changes in federal tax law or policy;

●

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

●

potential impairment to the goodwill we recorded in connection with our past acquisition; and

●

any other risks described in the “Risk Factors” section of this report and in the ~~prospectus~~Company’s Annual Report on Form 10-K as of December 31, 2019, filed with the SEC on March ~~14, 2018, pursuant to Rule 424(b)(4) under the Securities Act of 1933,~~12, 2020, as well as those set forth in this report and other reports filed by the Company with the SEC.

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

Overview

~~Bridgewater Bancshares, Inc. (the “Company”)~~The Company is a financial holding company headquartered in Bloomington, Minnesota with two wholly-owned subsidiaries, Bridgewater Bank (the “Bank”) and Bridgewater Risk Management, Inc., a captive insurance entity. The Bank has six full-service offices located in Bloomington, St. Louis Park, Greenwood, Minneapolis (2), and Orono, Minnesota. The principal ~~source~~sources of funds for loans and investments are transaction, savings, time, and other deposits, and short-term and long-term borrowings. The Company’s principal sources of income are interest and fees collected on loans, interest and dividends earned on investment securities and service charges. The Company’s principal expenses are interest paid on deposit accounts and borrowings, employee compensation and other overhead expenses. The Company’s simple, efficient business model of providing responsive support and unconventional experiences to clients continues to be the underlying principle that drives the Company’s profitable growth.

Information Regarding COVID-19 Impact

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

Effects on the Company’s Market Area. The Company’s primary banking market area is the Minneapolis-St. Paul-Bloomington, MN-WI Metropolitan Statistical Area. In Minnesota, the Governor issued an order on March 25,

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2020 that, subject to limited exceptions, required individuals to stay at home and non-essential businesses to cease all activities, other than minimum basic operations. This order was lifted as of May 18, 2020, and the state has entered a phased-in approach to reopening, where businesses must operate under certain restrictions based on the nature and industry of the business. As a result of the order and restrictions, Minnesota has experienced a dramatic and sudden increase in unemployment levels, significant stress on personal and business income, and recessionary economic conditions. Recent increases in COVID-19 infections across the nation have created uncertainty surrounding the future recovery of many companies’ operations and the local economy. Fortunately, to date Minnesota has been less impacted by the virus than other states in terms of cases and deaths.

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

●

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

●

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

●

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

●

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

●

In addition to the policy responses described above, the federal bank regulatory agencies, along with their state counterparts, have issued a stream of guidance in response to the COVID-19 pandemic and have taken a number of unprecedented steps to help banks navigate the pandemic and mitigate its impact. These include, without limitation: requiring banks to focus on business continuity and pandemic planning; adding pandemic scenarios to stress testing; encouraging bank use of capital buffers and reserves in lending programs; permitting certain regulatory reporting extensions; reducing margin requirements on swaps; permitting certain otherwise prohibited investments in investment funds; issuing guidance to encourage banks to work with customers affected by the pandemic and encourage loan workouts; and providing credit under the Community Reinvestment Act, or CRA, for certain pandemic-related loans, investments and public service. Moreover, because of the need for social distancing measures, the agencies revamped the manner in which they conducted periodic examinations of their

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regulated institutions, including making greater use of off-site reviews. The Federal Reserve also issued guidance encouraging banking institutions to utilize its discount window for loans and intraday credit extended by its Reserve Banks to help households and businesses impacted by the pandemic and announced numerous funding facilities. The FDIC has also acted to mitigate the deposit insurance assessment effects of participating in the PPP and the Federal Reserve’s PPP Liquidity Facility and Money Market Mutual Fund Liquidity Facility.

Capital and Liquidity. At June 30, 2020, the Company and Bank’s capital ratios were in excess of all regulatory requirements. The Company maintains access to multiple sources of liquidity. The Company has taken additional action to ensure the strength of its liquidity position by establishing borrowing capacity through the Federal Reserve lending facility in connection with funding PPP loans.

In addition, the Company issued $50.0 million of 5.25% Fixed-to-Floating Rate Subordinated Notes due June 2030 in a private placement on June 19, 2020. These notes are callable starting in 2025 and qualify for tier 2 capital treatment at the holding company level. The Company injected $25.0 million of capital into the Bank in connection with the subordinated note issuance, which qualifies for tier 1 capital treatment at the bank level.

Asset Valuation. During the six months ended June 30, 2020, the economic turmoil and market volatility resulting from the COVID-19 pandemic resulted in a substantial decrease in the Company’s stock price and market capitalization. The Company believed such decrease was a triggering event requiring an interim goodwill impairment analysis as of March 31, 2020. The Company performed an interim analysis and determined that goodwill was not more likely than not impaired, resulting in no impairment charge for the period. In the event that all or a portion of goodwill is impaired, a non-cash charge for the amount of such impairment would be recorded to earnings. Such a charge would have no impact on tangible capital or regulatory capital. At June 30, 2020, the Company had goodwill of $2.6 million.

Active Management of Credit Risk. The Company has modified its internal policies to increase oversight and analysis of all credits, especially in vulnerable industries such as hospitality to proactively monitor evolving credit risk. With the change in economic conditions and uncertain duration of the COVID-19 pandemic, the Company’s portfolio is expected to be negatively impacted and management expects delinquencies and charge-offs to rise in future periods due to the continued impact of the COVID-19 pandemic. The Company has not yet experienced charge-offs related to the COVID-19 pandemic, but the continued uncertainty regarding the severity and duration of the pandemic and related economic effects has and will continue to affect the Company’s estimate of its allowance for loan losses and resulting provision for loan losses. The Company will continue to monitor credits closely while working with clients to provide relief when appropriate.

COVID-19 Related Loan Deferrals and PPP Lending. The Company has developed programs for assisting existing clients through this uncertain time by providing, when appropriate, loan modifications that may include loan payment deferrals or interest-only modifications. As of June 30, 2020, the Company had closed loan modifications for 160 loans totaling $293.0 million. Of that total, loan modifications to interest-only payments totaled $175.3 million and loans with payment deferrals totaled $117.7 million. In accordance with recent regulatory guidance and the CARES Act, loans modified in response to the COVID-19 pandemic will not be considered TDRs.

In a further effort to assist both existing and new clients, the Company participated in government loan programs through the SBA, primarily the PPP. As of June 30, 2020, principal balances originated during the quarter totaled $180.2 million and resulted in fees from the SBA, net of costs, of $5.7 million, $528,000 of which was recognized in the second quarter of 2020.

Processes, Controls, and Business Continuity. The Company’s operations are being conducted in material compliance with current federal, state and local government guidelines regarding social distancing, sanitation, and personal hygiene. Throughout the quarter, the Company operated its bank branches with modified hours and limited locations. In June, the Company started to expand hours and reopen branch locations providing clients with full-service options at all but the Company’s two downtown locations, where offices remain closed and traffic would be minimal. To ensure the safety of the Company’s staff and clients, masks are mandatory and proper social distancing protocols are enforced. Non-branch personnel continue to work remotely. A COVID-19 Preparedness Plan has been created outlining

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the protocols for employees as they return to the office, which is currently scheduled for mid-August. Additional details about the Company’s COVID-19 pandemic assistance programs, including relevant disclosures and up-to-date information, are maintained at bwbmn.com.

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

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

Critical Accounting Policies and Estimates

The consolidated financial statements of the Company are prepared based on the application of certain accounting policies, the most significant of which are described in Note 1 of the notes to the consolidated financial statements included inas a part of the Company’s ~~prospectus that was filed with the SEC~~Annual Report on ~~March 14, 2018, pursuant to Rule 424(b)(4) under the Securities Act of 1933.~~Form 10-K. Certain of these policies require numerous estimates and strategic or economic assumptions that may prove inaccurate or subject to variation and may significantly affect the reported results and financial position for the current period or in future periods. The use of estimates, assumptions, and judgments are necessary when financial assets and liabilities are required to be recorded or adjusted to reflect fair value. Assets carried at fair value inherently result in more financial statement volatility. Fair values and information used to record valuation adjustments for certain assets and liabilities are based on either quoted market prices or are provided by other independent third-party sources, when available. When such information is not available, management estimates valuation adjustments. Changes in underlying factors, assumptions or estimates in any of these areas could have a material impact on the future financial condition and results of ~~operations.~~operations of the Company. Management has discussed each critical accounting policy and the methodology for the identification and determination of critical accounting policies with the Company's Audit Committee.

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

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

Allowance for Loan Losses

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

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

38

Table of Contents

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.

28

~~Table of Contents~~

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 a reasonable ~~estimate~~estimates of ~~the~~ fair value. The procedures include initial and ongoing ~~review~~reviews of pricing methodologies and trends. The Company seeks to ensure prices represent a reasonable ~~estimate~~estimates of fair value through the use of broker quotes, current sales transactions from the portfolio and pricing techniques, which are based on the net present value of future expected cash flows discounted at a rate of return market participants would require. As a result of this analysis, if the Company determines there is a more appropriate fair value, the price is adjusted accordingly.

Fair Value of Financial Instruments

The fair value of a financial instrument is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the reporting entity transacts business. A framework has been established for measuring the fair value of financial instruments that considers the attributes specific to particular assets or liabilities and includes a three-level hierarchy for determining fair value based on the transparency of inputs to each valuation as of the measurement date. The Company estimates the fair value of financial instruments using a variety of valuation methods. When financial instruments are actively traded and have quoted market prices, quoted market prices are used for fair value and are classified as Level 1. When financial instruments, such as investment securities and derivatives, are not actively traded, the Company determines fair value based on various sources and may apply matrix pricing with observable prices for similar instruments where a price for the identical instrument is not observable. The fair values of these financial instruments, which are classified as Level 2, are determined by pricing models that consider observable market data such as interest rate volatilities, London Interbank Offered Rate, or LIBOR, yield curve, credit spreads, prices from external market data providers and/or nonbinding broker-dealer quotations. When observable inputs do not exist, the Company estimates fair value based on available market data, and these values are classified as Level 3. Imprecision in estimating fair values can impact the carrying value of assets and liabilities and the amount of revenue or loss recorded.

Deferred Tax Asset

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

39

Table of Contents

change. Any reduction in estimated future taxable income may require usthe Company to record a valuation allowance against the deferred tax assets. A valuation allowance would result in additional income tax expense in such period, which would negatively affect earnings.

2940

Table of Contents

Operating Results Overview

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


	As of and for the Three Months Ended
	June 30,			March 31,			December 31,			September 30,			June 30,
	2020			2020			2019			2019			2019
Per Common Share Data
Basic Earnings Per Share	$	0.26		$	0.26		$	0.30		$	0.27		$	0.27
Diluted Earnings Per Share		0.26			0.25			0.29			0.27			0.26
Book Value Per Share		8.92			8.61			8.45			8.20			7.90
Tangible Book Value Per Share ⁽¹⁾		8.80			8.49			8.33			8.08			7.78
Basic Weighted Average Shares Outstanding		28,676,441			28,791,494			28,833,576			28,820,144			29,703,024
Diluted Weighted Average Shares Outstanding		29,165,157			29,502,245			29,561,103			29,497,961			30,312,039
Shares Outstanding at Period End		28,837,560			28,807,375			28,973,572			28,781,162			28,986,729

Selected Performance Ratios
Return on Average Assets (Annualized)		1.17	%		1.29	%		1.53	%		1.43	%		1.55	%
Pre-Provision Net Revenue Return on Average Assets (Annualized)⁽¹⁾		2.00			2.11			2.09			2.08			2.08
Return on Average Common Equity (Annualized)		11.98			11.94			14.16			13.31			13.88
Return on Average Tangible Common Equity (Annualized)⁽¹⁾		12.14			12.10			14.37			13.52			14.10
Yield on Interest Earning Assets		4.45			4.90			5.01			4.98			5.05
Yield on Total Loans, Gross		4.85			5.17			5.33			5.32			5.33
Cost of Interest Bearing Liabilities		1.58			1.84			1.96			2.04			2.07
Cost of Total Deposits		0.99			1.27			1.34			1.42			1.46
Net Interest Margin ⁽²⁾		3.38			3.59			3.65			3.56			3.60
Efficiency Ratio⁽¹⁾		48.6			44.4			49.6			45.6			50.1
Adjusted Efficiency Ratio⁽¹⁾		40.4			44.1			44.3			42.9			42.7
Noninterest Expense to Average Assets (Annualized)		1.64			1.69			1.87			1.66			1.84
Adjusted Noninterest Expense to Average Assets (Annualized) ⁽¹⁾		1.37			1.68			1.67			1.56			1.57
Loan to Deposit Ratio		97.8			105.4			104.9			102.4			105.0
Core Deposits to Total Deposits		75.7			78.6			80.7			79.9			78.3
Tangible Common Equity to Tangible Assets ⁽¹⁾		9.23			10.13			10.65			10.43			10.64

As of and for the Three Months Ended

Mar 31,

Mar 31,


2018

2017

Per Common Share Data (1)

Basic Earnings Per Share

$
0.23

$
0.17

Diluted Earnings Per Share

0.23

0.16

Book Value Per Share

6.62

4.91

Tangible Book Value Per Share (2)

6.49

4.75

Basic Weighted Average Shares Outstanding

25,755,764

24,589,861

Diluted Weighted Average Shares Outstanding

26,171,433

24,798,753

Shares Outstanding at Period End

30,059,374

24,589,861

Selected Performance Ratios

Return on Average Assets (Annualized)

1.48
%

1.26
%
Return on Average Common Equity (Annualized)

16.16

13.93

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

16.59

14.42

Yield on Interest Earning Assets

4.76

4.72

Yield on Total Loans, Gross

5.11

5.09

Cost of Interest Bearing Liabilities

1.37

1.08

Cost of Total Deposits

0.92

0.75

Net Interest Spread

3.39

3.64

Net Interest Margin (3)

3.77

3.97

Efficiency Ratio (2)

42.8

41.2

Noninterest Expense to Average Assets

1.61

1.60

Loan to Deposit Ratio

103.9

95.0

Core Deposits to Total Deposits

74.5

76.4

Tangible Common Equity to Tangible Assets (2)

11.64

8.64

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

~~(1)~~

~~Includes shares of our common stock and our non-voting common stock.~~

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

~~(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.~~

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Table of Contents

Selected Financial Data

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


	June 30,		March 31,		December 31,		September 30,		June 30,
(dollars in thousands)	2020		2020		2019		2019		2019
Selected Balance Sheet Data
Total Assets	$	2,754,463	$	2,418,730	$	2,268,830	$	2,232,339	$	2,123,631
Total Loans, Gross		2,193,778		2,002,817		1,912,038		1,846,218		1,784,903
Allowance for Loan Losses		27,633		24,585		22,526		22,124		21,362
Goodwill and Other Intangibles		3,391		3,439		3,487		3,535		3,582

Deposits		2,242,051		1,900,127		1,823,310		1,802,236		1,699,265
Tangible Common Equity⁽¹⁾		253,799		244,704		241,307		232,524		225,555
Total Shareholders' Equity		257,190		248,143		244,794		236,059		229,137
Average Total Assets - Quarter-to-Date		2,622,272		2,317,040		2,221,370		2,168,909		2,069,707
Average Common Equity - Quarter-to-Date		255,109		250,800		240,188		232,590		231,374

As of and for the Three Months Ended

Mar 31,

Mar 31,


2018

2017

% Change

Selected Balance Sheet Data

Total Assets

$
1,681,597

$
1,354,354

24.2
%
Total Loans, Gross

1,405,420

1,084,752

29.6

Allowance for Loan Losses

17,121

13,216

29.5

Goodwill and Other Intangibles

3,821

4,012

(4.8)

Deposits

1,353,036

1,141,837

18.5

Tangible Common Equity (1)

195,218

116,730

67.2

Total Shareholders' Equity

199,039

120,742

64.8

Average Total Assets

1,625,749

1,312,058

23.9

Average Common Equity

149,318

118,870

25.6

Selected Income Statement Data

Interest Income

$
18,710

$
14,612

28.0
%
Interest Expense

3,947

2,421

63.0

     Net Interest Income

14,763

12,191

21.1

Provision for Loan Losses

600

950

(36.8)

    Net Interest Income after Provision for Loan Losses

14,163

11,241

26.0

Noninterest Income

387

480

(19.4)

Noninterest Expense

6,532

5,254

24.3

   Income Before Income Taxes

8,018

6,467

24.0

Provision for Income Taxes

2,068

2,384

(13.3)

    Net Income

$
5,950

$
4,083

45.7

(1)

~~(1)~~

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


	For the Three Months Ended
	June 30,		March 31,		December 31,		September 30,		June 30,
(dollars in thousands)	2020		2020		2019		2019		2019
Selected Income Statement Data
Interest Income	$	28,166	$	27,468	$	27,419	$	26,572	$	25,520
Interest Expense		6,824		7,366		7,491		7,637		7,382
Net Interest Income		21,342		20,102		19,928		18,935		18,138
Provision for Loan Losses		3,000		2,100		600		900		600
Net Interest Income after Provision for Loan Losses		18,342		18,002		19,328		18,035		17,538
Noninterest Income		1,977		1,719		1,112		946		1,134
Noninterest Expense		10,711		9,746		10,489		9,084		9,474
Income Before Income Taxes		9,608		9,975		9,951		9,897		9,198
Provision for Income Taxes		2,010		2,532		1,380		2,092		1,189
Net Income	$	7,598	$	7,443	$	8,571	$	7,805	$	8,009

42

Table of Contents

Discussion and Analysis of Results of Operations

Net Income

Net income was $7.6 million for the second quarter of 2020, a 5.1% decrease over net income of $8.0 million for the second quarter of 2019. Net income per diluted common share for the second quarter of 2020 and 2019 was $0.26. Net income was $15.0 million for the six months ended June 30, 2020 and 2019. Net income per diluted common share for the six months ended June 30, 2020 was $0.51, a 4.0% increase compared to $0.49 per diluted common share for the six months ended June 30, 2019.

Net Interest Income

The Company’s primary source of revenue is net interest income, which is impacted by the level of interest earning assets and related funding sources, as well as changes in the ~~levels~~level of interest rates. The difference between the average yield on earning assets and the average rate paid for interest bearing liabilities is the net interest spread. Noninterest bearing sources of funds, such as demand deposits and shareholders’ equity, also support earning assets. The impact of the noninterest bearing sources of funds is captured in the net interest margin, which is calculated as net interest income divided by average earning assets. Both the net interest margin and net interest spread are presented on a tax-equivalent basis, which means that tax-free interest income has been adjusted to pretax-equivalent income, assuming a 21% federal tax ~~rate beginning in 2018. A 35% federal tax rate has been applied to periods prior to 2018.~~rate. Management’s ability to respond to changes in interest rates by using effective asset-liability management techniques is critical to maintaining the stability of the net interest margin and the momentum of the Company’s primary source of earnings. In response to the COVID-19 pandemic, the Federal Open Market Committee, or FOMC, decreased the targeted federal funds rate by a total of 150 basis points in March 2020. This decrease may impact the comparability of net interest income between 2019 and 2020 in future periods.

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Table of Contents

Average Balances and Yields

The following ~~table shows,~~tables present, for the three and six months ended ~~March 31, 2018~~June 30, 2020 and ~~2017,~~2019, the average balances of each principal category of assets, liabilities and shareholders’ equity, and an analysis of net interest income. The average balances are principally daily averages and, for loans, include both performing and nonperforming balances. Interest income on loans includes the effects of net deferred loan origination fees and costs accounted for as yield adjustments. ~~This table is~~These tables are presented on a tax-equivalent basis, if applicable.


	For the Three Months Ended
	June 30, 2020						June 30, 2019
	Average		Interest		Yield/		Average		Interest		Yield/
	Balance		& Fees		Rate		Balance		& Fees		Rate
(dollars in thousands)
Interest Earning Assets:
Cash Investments	$	109,073	$	37	0.14	%	$	38,142	$	171	1.80	%
Investment Securities:
Taxable Investment Securities		203,559		1,304	2.58			140,890		1,058	3.01
Tax-Exempt Investment Securities⁽¹⁾		91,793		996	4.37			103,223		1,103	4.28
Total Investment Securities		295,352		2,300	3.13			244,113		2,161	3.55
Paycheck Protection Program Loans ⁽²⁾		139,235		873	2.52			—		—	—
Loans ⁽¹⁾⁽²⁾		2,013,163		25,070	5.01			1,755,686		23,321	5.33
Total Loans		2,152,398		25,943	4.85			1,755,686		23,321	5.33
Federal Home Loan Bank Stock		10,469		125	4.81			7,694		100	5.23
Total Interest Earning Assets		2,567,292		28,405	4.45	%		2,045,635		25,753	5.05	%
Noninterest Earning Assets		54,980						24,072
Total Assets	$	2,622,272					$	2,069,707
Interest Bearing Liabilities:
Deposits:
Interest Bearing Transaction Deposits		272,565		377	0.56	%		202,886		387	0.77	%
Savings and Money Market Deposits		521,313		1,327	1.02			431,716		1,938	1.80
Time Deposits		388,357		2,122	2.20			354,026		2,120	2.40
Brokered Deposits		319,711		1,344	1.69			266,804		1,575	2.37
Total Interest Bearing Deposits		1,501,946		5,170	1.38			1,255,432		6,020	1.92
Federal Funds Purchased		9		—	0.72			2,089		12	2.24
Notes Payable		12,000		111	3.72			14,000		130	3.72
FHLB Advances		193,819		1,064	2.21			131,385		827	2.52
Subordinated Debentures		31,228		479	6.17			24,673		393	6.39
Total Interest Bearing Liabilities		1,739,002		6,824	1.58	%		1,427,579		7,382	2.07	%
Noninterest Bearing Liabilities:
Noninterest Bearing Transaction Deposits		603,456						401,480
Other Noninterest Bearing Liabilities		24,705						9,274
Total Noninterest Bearing Liabilities		628,161						410,754
Shareholders' Equity		255,109						231,374
Total Liabilities and Shareholders' Equity	$	2,622,272					$	2,069,707
Net Interest Income / Interest Rate Spread				21,581	2.87	%				18,371	2.98	%
Net Interest Margin ⁽³⁾					3.38	%					3.60	%
Taxable Equivalent Adjustment:
Tax-Exempt Investment Securities				(239)						(233)
Net Interest Income			$	21,342					$	18,138

For the three-month period ended

March 31, 2018

March 31, 2017

Average

Interest

Yield/

Average

Interest

Yield/


Balance

& Fees

Rate

Balance

& Fees

Rate

(dollars in thousands)

Interest Earning Assets:

Cash Investments

$
21,693

$
49

0.92
%
$
19,014

$
33

0.70
%
Investment Securities:

Taxable Investment Securities

119,218

633

2.15

96,587

374

1.57

Tax-Exempt Investment Securities (1)

114,828

1,183

4.18

130,230

1,516

4.72

Total Investment Securities

234,046

1,816

3.15

226,817

1,890

3.38

Loans (2)

1,353,031

17,048

5.11

1,051,058

13,192

5.09

Federal Home Loan Bank Stock

5,393

45

3.38

4,170

28

2.72

Total Interest Earning Assets

1,614,163

18,958

4.76

1,301,059

15,143

4.72
%
Noninterest Earning Assets

11,586

10,999

Total Assets

$
1,625,749

$
1,312,058

Interest Bearing Liabilities:

Interest Bearing Transaction Deposits

168,509

113

0.27
%

127,346

77

0.25
%
Savings and Money Market Deposits

354,009

756

0.87

251,027

418

0.68

Time Deposits

298,333

1,223

1.66

278,864

1,017

1.48

Brokered Deposits

211,058

917

1.76

153,412

506

1.34

Federal Funds Purchased

28,511

118

1.68

22,956

49

0.87

Notes Payable

16,500

152

3.74

18,500

167

3.66

FHLB Advances

68,278

299

1.78

53,000

187

1.43

Subordinated Debentures

24,544

369

6.10

—

—

—

Total Interest Bearing Liabilities

1,169,742

3,947

1.37
%

905,105

2,421

1.08
%
Noninterest Bearing Liabilities:

Noninterest Bearing Transaction Deposits

295,587

286,833

Other Noninterest Bearing Liabilities

11,102

1,250

Total Noninterest Bearing Liabilities

306,689

288,083

Shareholders' Equity

149,318

118,870

Total Liabilities and Shareholders' Equity

$
1,625,749

$
1,312,058

Net Interest Income/ Interest Rate Spread

15,011

3.39
%

12,722

3.64
%
Net Interest Margin (3)

3.77
%

3.97
%
Taxable Equivalent Adjustment:

Tax-Exempt Investment Securities

(248)

(531)

Net Interest Income

$
14,763

$
12,191

(1)

~~(1)~~

Interest income and average rates for tax-exempt investment securities and loans are presented on a tax-equivalent basis, assuming a federal income tax rate of 21% ~~in 2018 and 35% in 2017.~~

.

(2)

~~(2)~~

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

44

Table of Contents

(3)

~~(3)~~

Net ~~tax-equivalent~~ interest margin ~~during~~includes the ~~periods presented represents:~~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.


	For the Six Months Ended
	June 30, 2020						June 30, 2019
	Average		Interest		Yield/		Average		Interest		Yield/
	Balance		& Fees		Rate		Balance		& Fees		Rate
(dollars in thousands)
Interest Earning Assets:
Cash Investments	$	69,267	$	96	0.28	%	$	33,071	$	258	1.57	%
Investment Securities:
Taxable Investment Securities		195,873		2,691	2.76			139,651		2,031	2.93
Tax-Exempt Investment Securities⁽¹⁾		93,260		2,021	4.36			106,823		2,276	4.30
Total Investment Securities		289,133		4,712	3.28			246,474		4,307	3.52
Paycheck Protection Loans ⁽²⁾		70,037		873	2.51			—		—	—
Loans ⁽¹⁾⁽²⁾		1,983,641		50,220	5.09			1,731,928		45,500	5.30
Total Loans		2,053,678		51,093	5.00			1,731,928		45,500	5.30
Federal Home Loan Bank Stock		10,370		225	4.37			7,802		200	5.17
Total Interest Earning Assets		2,422,448		56,126	4.66	%		2,019,275		50,265	5.02	%
Noninterest Earning Assets		47,208						21,327
Total Assets	$	2,469,656					$	2,040,602
Interest Bearing Liabilities:
Interest Bearing Transaction Deposits		259,704		807	0.63	%		192,020		619	0.65	%
Savings and Money Market Deposits		527,445		3,232	1.23			423,310		3,704	1.76
Time Deposits		382,256		4,300	2.26			341,836		4,001	2.36
Brokered Deposits		269,000		2,555	1.91			279,366		3,399	2.45
Total Deposits		1,438,405		10,894	1.52			1,236,532		11,723	1.91
Federal Funds Purchased		12,422		107	1.74			13,459		172	2.58
Notes Payable		12,253		226	3.71			14,250		251	3.55
FHLB Advances		183,099		2,091	2.30			127,713		1,602	2.53
Subordinated Debentures		27,986		872	6.27			24,660		770	6.30
Total Interest Bearing Liabilities		1,674,165		14,190	1.70	%		1,416,614		14,518	2.07	%
Noninterest Bearing Liabilities:
Noninterest Bearing Transaction Deposits		523,828						385,758
Other Noninterest Bearing Liabilities		18,708						9,605
Total Noninterest Bearing Liabilities		542,536						395,363
Shareholders' Equity		252,955						228,625
Total Liabilities and Shareholders' Equity	$	2,469,656					$	2,040,602
Net Interest Income / Interest Rate Spread				41,936	2.96	%				35,747	2.95	%
Net Interest Margin ⁽³⁾					3.48	%					3.57	%
Taxable Equivalent Adjustment:
Tax-Exempt Investment Securities				(492)						(478)
Net Interest Income			$	41,444					$	35,269

32

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

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

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

~~Table of Contents~~

Noninterest Income

1,977

1,719

1,112

946

1,134

Noninterest Expense

10,711

9,746

10,489

9,084

9,474

Income Before Income Taxes

9,608

9,975

9,951

9,897

9,198

Provision for Income Taxes

2,010

2,532

1,380

2,092

1,189

Net Income

$

7,598

$

7,443

$

8,571

$

7,805

$

8,009

42

Table of Contents

Discussion and Analysis of Results of Operations

Net Income

Net income was $7.6 million for the second quarter of 2020, a 5.1% decrease over net income of $8.0 million for the second quarter of 2019. Net income per diluted common share for the second quarter of 2020 and 2019 was $0.26. Net income was $15.0 million for the six months ended June 30, 2020 and 2019. Net income per diluted common share for the six months ended June 30, 2020 was $0.51, a 4.0% increase compared to $0.49 per diluted common share for the six months ended June 30, 2019.

Net Interest Income

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

43

Table of Contents

Average Balances and Yields

The following tables present, for the three and six months ended June 30, 2020 and 2019, the average balances of each principal category of assets, liabilities and shareholders’ equity, and an analysis of net interest income. The average balances are principally daily averages and, for loans, include both performing and nonperforming balances. Interest income on loans includes the effects of net deferred loan origination fees and costs accounted for as yield adjustments. These tables are presented on a tax-equivalent basis, if applicable.


	For the Three Months Ended
	June 30, 2020						June 30, 2019
	Average		Interest		Yield/		Average		Interest		Yield/
	Balance		& Fees		Rate		Balance		& Fees		Rate
(dollars in thousands)
Interest Earning Assets:
Cash Investments	$	109,073	$	37	0.14	%	$	38,142	$	171	1.80	%
Investment Securities:
Taxable Investment Securities		203,559		1,304	2.58			140,890		1,058	3.01
Tax-Exempt Investment Securities⁽¹⁾		91,793		996	4.37			103,223		1,103	4.28
Total Investment Securities		295,352		2,300	3.13			244,113		2,161	3.55
Paycheck Protection Program Loans ⁽²⁾		139,235		873	2.52			—		—	—
Loans ⁽¹⁾⁽²⁾		2,013,163		25,070	5.01			1,755,686		23,321	5.33
Total Loans		2,152,398		25,943	4.85			1,755,686		23,321	5.33
Federal Home Loan Bank Stock		10,469		125	4.81			7,694		100	5.23
Total Interest Earning Assets		2,567,292		28,405	4.45	%		2,045,635		25,753	5.05	%
Noninterest Earning Assets		54,980						24,072
Total Assets	$	2,622,272					$	2,069,707
Interest Bearing Liabilities:
Deposits:
Interest Bearing Transaction Deposits		272,565		377	0.56	%		202,886		387	0.77	%
Savings and Money Market Deposits		521,313		1,327	1.02			431,716		1,938	1.80
Time Deposits		388,357		2,122	2.20			354,026		2,120	2.40
Brokered Deposits		319,711		1,344	1.69			266,804		1,575	2.37
Total Interest Bearing Deposits		1,501,946		5,170	1.38			1,255,432		6,020	1.92
Federal Funds Purchased		9		—	0.72			2,089		12	2.24
Notes Payable		12,000		111	3.72			14,000		130	3.72
FHLB Advances		193,819		1,064	2.21			131,385		827	2.52
Subordinated Debentures		31,228		479	6.17			24,673		393	6.39
Total Interest Bearing Liabilities		1,739,002		6,824	1.58	%		1,427,579		7,382	2.07	%
Noninterest Bearing Liabilities:
Noninterest Bearing Transaction Deposits		603,456						401,480
Other Noninterest Bearing Liabilities		24,705						9,274
Total Noninterest Bearing Liabilities		628,161						410,754
Shareholders' Equity		255,109						231,374
Total Liabilities and Shareholders' Equity	$	2,622,272					$	2,069,707
Net Interest Income / Interest Rate Spread				21,581	2.87	%				18,371	2.98	%
Net Interest Margin ⁽³⁾					3.38	%					3.60	%
Taxable Equivalent Adjustment:
Tax-Exempt Investment Securities				(239)						(233)
Net Interest Income			$	21,342					$	18,138

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

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

44

Table of Contents

(3)

Net interest margin includes the tax equivalent adjustment and ~~decreases in~~represents the annualized results of: (i) the difference between 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~~expense on interest bearing ~~liabilities. The effect of changes in volume is determined~~liabilities, divided by ~~multiplying the change in volume by the previous period’s~~(ii) average rate. Similarly, the effect of rate changes is calculated by multiplying the change in average rate by the previous period’s volume. Changes which are not due solely to volume or rate have been allocated to these categories based on the respective percentage changes in average volume and average rate as they compare to each other. The following tables present the changes in the volume and rate of interest bearing assets and liabilities for the three months ended March 31, 2018, compared to the three months ended March 31, 2017.

Three Months Ended March 31, 2018

Compared with

Three Months Ended March 31, 2017

Change Due To:

Interest
(dollars in thousands)


Volume


Rate


Variance
Interest Earning Assets:

Cash Investments

5

11

16
Investment Securities:

Taxable Investment Securities

88

171

259
Tax Exempt Investment Securities

(179)

(154)

(333)
Total Securities

(91)

17

(74)
Loans

3,790

66

3,856
Federal Home Loan Bank Stock

8

9

17
Total Interest Earning Assets

$
3,712

$
103

$
3,815

Interest Bearing Liabilities:

Interest Bearing Transaction Deposits

25

11

36
Savings and Money Market Deposits

171

167

338
Time Deposits

71

135

206
Brokered Deposits

190

221

411
Federal Funds Purchased

12

57

69
Notes Payable

(18)

3

(15)
FHLB Advances

54

58

112
Subordinated Debentures

—

369

369
Total Interest Bearing Liabilities

$
505

$
1,021

$
1,526
Net Interest Income

$
3,207

$
(918)

$
2,289

~~Comparison of Net Interest Income for the three months ended March 31, 2018 and 2017~~

Net interest income was $14.8 million for the first quarter of 2018, an increase of $2.6 million, or 21.1%, compared to $12.2 million for the first quarter of 2017. The increase in net interest income was largely attributable to growth in average interest earning assets, due to continued organic growth in the loan portfolio.

Net interest spread and net interest margin were 3.39% and 3.77%, respectively, for the first quarter of 2018, compared to 3.64% and 3.97%, respectively, for the first quarter of 2017. While net interest margin has 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. Furthermore, the lower statutory federal tax rate reduced the tax equivalent adjustment by seven basis points.

~~Average~~ interest earning assets for the ~~first quarter of 2018 increased $313.1 million, or 24.1%, to $1.61 billion from $1.30 billion~~period.


	For the Six Months Ended
	June 30, 2020						June 30, 2019
	Average		Interest		Yield/		Average		Interest		Yield/
	Balance		& Fees		Rate		Balance		& Fees		Rate
(dollars in thousands)
Interest Earning Assets:
Cash Investments	$	69,267	$	96	0.28	%	$	33,071	$	258	1.57	%
Investment Securities:
Taxable Investment Securities		195,873		2,691	2.76			139,651		2,031	2.93
Tax-Exempt Investment Securities⁽¹⁾		93,260		2,021	4.36			106,823		2,276	4.30
Total Investment Securities		289,133		4,712	3.28			246,474		4,307	3.52
Paycheck Protection Loans ⁽²⁾		70,037		873	2.51			—		—	—
Loans ⁽¹⁾⁽²⁾		1,983,641		50,220	5.09			1,731,928		45,500	5.30
Total Loans		2,053,678		51,093	5.00			1,731,928		45,500	5.30
Federal Home Loan Bank Stock		10,370		225	4.37			7,802		200	5.17
Total Interest Earning Assets		2,422,448		56,126	4.66	%		2,019,275		50,265	5.02	%
Noninterest Earning Assets		47,208						21,327
Total Assets	$	2,469,656					$	2,040,602
Interest Bearing Liabilities:
Interest Bearing Transaction Deposits		259,704		807	0.63	%		192,020		619	0.65	%
Savings and Money Market Deposits		527,445		3,232	1.23			423,310		3,704	1.76
Time Deposits		382,256		4,300	2.26			341,836		4,001	2.36
Brokered Deposits		269,000		2,555	1.91			279,366		3,399	2.45
Total Deposits		1,438,405		10,894	1.52			1,236,532		11,723	1.91
Federal Funds Purchased		12,422		107	1.74			13,459		172	2.58
Notes Payable		12,253		226	3.71			14,250		251	3.55
FHLB Advances		183,099		2,091	2.30			127,713		1,602	2.53
Subordinated Debentures		27,986		872	6.27			24,660		770	6.30
Total Interest Bearing Liabilities		1,674,165		14,190	1.70	%		1,416,614		14,518	2.07	%
Noninterest Bearing Liabilities:
Noninterest Bearing Transaction Deposits		523,828						385,758
Other Noninterest Bearing Liabilities		18,708						9,605
Total Noninterest Bearing Liabilities		542,536						395,363
Shareholders' Equity		252,955						228,625
Total Liabilities and Shareholders' Equity	$	2,469,656					$	2,040,602
Net Interest Income / Interest Rate Spread				41,936	2.96	%				35,747	2.95	%
Net Interest Margin ⁽³⁾					3.48	%					3.57	%
Taxable Equivalent Adjustment:
Tax-Exempt Investment Securities				(492)						(478)
Net Interest Income			$	41,444					$	35,269

(1)

Interest income and average rates for the first quarter of 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

33

~~Table of Contents~~

increased $264.6 million, or 29.2%, to $1.17 billion for the first quarter of 2018, from $905.1 million for the first quarter of 2017. The increase in average interest bearing liabilities was primarily due to an increase in interest bearing depositstax-exempt investment securities and the issuance of $25.0 million of subordinated debentures in July of 2017. The ratio of average interest earning assets to average interest bearing liabilities was 138.0% and 143.7% for the first quarter of 2018 and 2017, respectively.

Average interest earning assets produced a tax-equivalent yield of 4.76% for the first quarter of 2018, compared to 4.72% for the first quarter of 2017. The average rate paid on interest bearing liabilities was 1.37% for the first quarter of 2018, compared to 1.08% for the first quarter of 2017.

~~Interest Income.~~ ~~Total interest income~~loans are presented on a tax-equivalent basis, ~~was $19.0 million for the first quarter~~assuming a federal income tax rate of ~~2018, compared to $15.1 million for the first quarter of 2017. The $3.8 million, or 25.2%, increase in total interest income on a tax-equivalent basis was primarily due to organic growth in the~~21%.

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

(3)

Net interest margin includes the ~~first quarter of 2018 was $17.0 million, compared to $13.2 million for~~tax equivalent adjustment and represents the ~~first quarter of 2017. The $3.9 million, or 29.2%, increase was primarily due to a 28.7% increase in~~annualized results of: (i) the average balance of loans outstanding and a two basis point increase in the average yield on loans. The increase in the average balance of loans outstanding was primarily due to organic loan growth in commercial real estate loans. The increase in yield on the loan portfolio resulted primarily from increases in offering rates. Interestdifference between interest income on interest earning assets and the investment securities portfolio on a fully-tax equivalent basis decreased $74,000, or 3.9%, during the first quarter of 2018 compared to the first quarter of 2017 despite a $7.2 million increase in average balances between the periods. The lower statutory federal tax rate reduced the fully-tax equivalent adjustment by $255,000 and decreased the yield seven basis points.

~~Interest Expense.~~ ~~Interest~~interest expense on interest bearing liabilities, ~~increased $1.5 million, or 63.0%, to $3.9 million~~divided by (ii) average interest earning assets for the ~~first quarter of 2018, as compared to $2.4 million for the first quarter of 2017, primarily due to increased balances and rates on non-core deposits and borrowings.~~period.

Interest expense on deposits increased to $3.0 million for the first quarter of 2018, as compared to $2.0 million for the first quarter of 2017. The $1.0 million, or 49.1%, increase in interest expense on deposits was primarily due to the average balance of deposits increasing 27.3% combined with a 17 basis point increase in the average rate paid. The increase in the average balance of deposits resulted primarily from increases in transaction deposits, savings and money market deposits, and brokered deposits. The increase in the average rate paid was primarily due to the impact of higher market interest rates demanded on deposits.

Interest expense on borrowings increased $535,000 to $938,000 for the first quarter of 2018, as compared to $403,000 for the first quarter of 2017. 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 and FHLB Advances, offset in part by a reduction in interest expense on notes payable as a result of decreased principal balance.

~~Provision for Loan Losses~~

The provision for loan losses was $600,000 for the first quarter of 2018, a decrease of $350,000, compared to the provision for loan losses of $950,000 for the first quarter of 2017. The provision decreased in the first quarter of 2018 due largely to lower net charge-offs and overall improvement in asset quality, coupled with moderate loan growth in comparison to the first quarter of 2017. The allowance for loan losses to total gross loans ratio was 1.22% as of March 31, 2018 and 2017.

34

~~Table of Contents~~

Noninterest Income

1,977

1,719

1,112

946

1,134

Noninterest Expense

10,711

9,746

10,489

9,084

9,474

Income Before Income Taxes

9,608

9,975

9,951

9,897

9,198

Provision for Income Taxes

2,010

2,532

1,380

2,092

1,189

Net Income

$

7,598

$

7,443

$

8,571

$

7,805

$

8,009

42

Table of Contents

Discussion and Analysis of Results of Operations

Net Income

Net income was $7.6 million for the second quarter of 2020, a 5.1% decrease over net income of $8.0 million for the second quarter of 2019. Net income per diluted common share for the second quarter of 2020 and 2019 was $0.26. Net income was $15.0 million for the six months ended June 30, 2020 and 2019. Net income per diluted common share for the six months ended June 30, 2020 was $0.51, a 4.0% increase compared to $0.49 per diluted common share for the six months ended June 30, 2019.

Net Interest Income

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

43

Table of Contents

Average Balances and Yields

The following tables present, for the three and six months ended June 30, 2020 and 2019, the average balances of each principal category of assets, liabilities and shareholders’ equity, and an analysis of net interest income. The average balances are principally daily averages and, for loans, include both performing and nonperforming balances. Interest income on loans includes the effects of net deferred loan origination fees and costs accounted for as yield adjustments. These tables are presented on a tax-equivalent basis, if applicable.


	For the Three Months Ended
	June 30, 2020						June 30, 2019
	Average		Interest		Yield/		Average		Interest		Yield/
	Balance		& Fees		Rate		Balance		& Fees		Rate
(dollars in thousands)
Interest Earning Assets:
Cash Investments	$	109,073	$	37	0.14	%	$	38,142	$	171	1.80	%
Investment Securities:
Taxable Investment Securities		203,559		1,304	2.58			140,890		1,058	3.01
Tax-Exempt Investment Securities⁽¹⁾		91,793		996	4.37			103,223		1,103	4.28
Total Investment Securities		295,352		2,300	3.13			244,113		2,161	3.55
Paycheck Protection Program Loans ⁽²⁾		139,235		873	2.52			—		—	—
Loans ⁽¹⁾⁽²⁾		2,013,163		25,070	5.01			1,755,686		23,321	5.33
Total Loans		2,152,398		25,943	4.85			1,755,686		23,321	5.33
Federal Home Loan Bank Stock		10,469		125	4.81			7,694		100	5.23
Total Interest Earning Assets		2,567,292		28,405	4.45	%		2,045,635		25,753	5.05	%
Noninterest Earning Assets		54,980						24,072
Total Assets	$	2,622,272					$	2,069,707
Interest Bearing Liabilities:
Deposits:
Interest Bearing Transaction Deposits		272,565		377	0.56	%		202,886		387	0.77	%
Savings and Money Market Deposits		521,313		1,327	1.02			431,716		1,938	1.80
Time Deposits		388,357		2,122	2.20			354,026		2,120	2.40
Brokered Deposits		319,711		1,344	1.69			266,804		1,575	2.37
Total Interest Bearing Deposits		1,501,946		5,170	1.38			1,255,432		6,020	1.92
Federal Funds Purchased		9		—	0.72			2,089		12	2.24
Notes Payable		12,000		111	3.72			14,000		130	3.72
FHLB Advances		193,819		1,064	2.21			131,385		827	2.52
Subordinated Debentures		31,228		479	6.17			24,673		393	6.39
Total Interest Bearing Liabilities		1,739,002		6,824	1.58	%		1,427,579		7,382	2.07	%
Noninterest Bearing Liabilities:
Noninterest Bearing Transaction Deposits		603,456						401,480
Other Noninterest Bearing Liabilities		24,705						9,274
Total Noninterest Bearing Liabilities		628,161						410,754
Shareholders' Equity		255,109						231,374
Total Liabilities and Shareholders' Equity	$	2,622,272					$	2,069,707
Net Interest Income / Interest Rate Spread				21,581	2.87	%				18,371	2.98	%
Net Interest Margin ⁽³⁾					3.38	%					3.60	%
Taxable Equivalent Adjustment:
Tax-Exempt Investment Securities				(239)						(233)
Net Interest Income			$	21,342					$	18,138

(1)	Interest income ~~was $387,000~~ and ~~$480,000~~average rates for tax-exempt investment securities and loans are presented on a tax-equivalent basis, assuming a federal income tax rate of 21%.

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

44

Table of Contents

(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 ~~first quarter~~period.


	For the Six Months Ended
	June 30, 2020						June 30, 2019
	Average		Interest		Yield/		Average		Interest		Yield/
	Balance		& Fees		Rate		Balance		& Fees		Rate
(dollars in thousands)
Interest Earning Assets:
Cash Investments	$	69,267	$	96	0.28	%	$	33,071	$	258	1.57	%
Investment Securities:
Taxable Investment Securities		195,873		2,691	2.76			139,651		2,031	2.93
Tax-Exempt Investment Securities⁽¹⁾		93,260		2,021	4.36			106,823		2,276	4.30
Total Investment Securities		289,133		4,712	3.28			246,474		4,307	3.52
Paycheck Protection Loans ⁽²⁾		70,037		873	2.51			—		—	—
Loans ⁽¹⁾⁽²⁾		1,983,641		50,220	5.09			1,731,928		45,500	5.30
Total Loans		2,053,678		51,093	5.00			1,731,928		45,500	5.30
Federal Home Loan Bank Stock		10,370		225	4.37			7,802		200	5.17
Total Interest Earning Assets		2,422,448		56,126	4.66	%		2,019,275		50,265	5.02	%
Noninterest Earning Assets		47,208						21,327
Total Assets	$	2,469,656					$	2,040,602
Interest Bearing Liabilities:
Interest Bearing Transaction Deposits		259,704		807	0.63	%		192,020		619	0.65	%
Savings and Money Market Deposits		527,445		3,232	1.23			423,310		3,704	1.76
Time Deposits		382,256		4,300	2.26			341,836		4,001	2.36
Brokered Deposits		269,000		2,555	1.91			279,366		3,399	2.45
Total Deposits		1,438,405		10,894	1.52			1,236,532		11,723	1.91
Federal Funds Purchased		12,422		107	1.74			13,459		172	2.58
Notes Payable		12,253		226	3.71			14,250		251	3.55
FHLB Advances		183,099		2,091	2.30			127,713		1,602	2.53
Subordinated Debentures		27,986		872	6.27			24,660		770	6.30
Total Interest Bearing Liabilities		1,674,165		14,190	1.70	%		1,416,614		14,518	2.07	%
Noninterest Bearing Liabilities:
Noninterest Bearing Transaction Deposits		523,828						385,758
Other Noninterest Bearing Liabilities		18,708						9,605
Total Noninterest Bearing Liabilities		542,536						395,363
Shareholders' Equity		252,955						228,625
Total Liabilities and Shareholders' Equity	$	2,469,656					$	2,040,602
Net Interest Income / Interest Rate Spread				41,936	2.96	%				35,747	2.95	%
Net Interest Margin ⁽³⁾					3.48	%					3.57	%
Taxable Equivalent Adjustment:
Tax-Exempt Investment Securities				(492)						(478)
Net Interest Income			$	41,444					$	35,269

(1)	Interest income and average rates for tax-exempt investment securities and loans are presented on a tax-equivalent basis, assuming a federal income tax rate of ~~2018~~21%.

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

(3)

Net interest margin includes the tax equivalent adjustment and ~~2017, respectively. The decrease of $93,000 was primarily due to lower gains~~represents the annualized results of: (i) the difference between interest income on ~~sales of investments and foreclosed~~interest earning assets and ~~decreased letter of credit fees. These decreases were offset in part~~the interest expense on interest bearing liabilities, divided by ~~increased fees related to customer deposit accounts due to an overall increase in the number of deposit clients. The following table presents the major components of noninterest income~~(ii) average interest earning assets for the ~~first quarter of 2018, compared to the first quarter of 2017:~~period.

Interest Rates and Operating Interest Differential

Increases and decreases in interest income and interest expense result from changes in average balances (volume) of interest earning assets and interest bearing liabilities, as well as changes in average interest rates. The following table presents the effect that these factors had on the interest earned on interest earning assets and the interest

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incurred on interest bearing liabilities. The effect of changes in volume is determined by multiplying the change in volume by the previous period’s average rate. Similarly, the effect of rate changes is calculated by multiplying the change in average rate by the previous period’s volume. The changes not attributable specifically to either volume or rate have been allocated to the changes due to volume. The following tables present the changes in the volume and rate of interest bearing assets and liabilities for the three months ended June 30, 2020, compared to the three months ended June 30, 2019, and for the six months ended June 30, 2020, compared to the six months ended June 30, 2019.


	Three Months Ended June 30, 2020
	Compared with
	Three Months Ended June 30, 2019
	Change Due To:				Interest
(dollars in thousands)	Volume		Rate		Variance
Interest Earning Assets:
Cash Investments	$	24	$	(158)	$	(134)
Investment Securities:
Taxable Investment Securities		399		(153)		246
Tax-Exempt Investment Securities		(128)		21		(107)
Total Securities		271		(132)		139
Loans:
Paycheck Protection Program Loans		873		—		873
Loans		3,147		(1,398)		1,749
Total Loans		4,020		(1,398)		2,622
Federal Home Loan Bank Stock		33		(8)		25
Total Interest Earning Assets	$	4,348	$	(1,696)	$	2,652

Interest Bearing Liabilities:
Interest Bearing Transaction Deposits	$	96	$	(106)	$	(10)
Savings and Money Market Deposits		225		(836)		(611)
Time Deposits		182		(180)		2
Brokered Deposits		219		(450)		(231)
Total Deposits	��	722		(1,572)		(850)
Federal Funds Purchased		(4)		(8)		(12)
Notes Payable		(19)		—		(19)
FHLB Advances		340		(103)		237
Subordinated Debentures		100		(14)		86
Total Interest Bearing Liabilities		1,139		(1,697)		(558)
Net Interest Income	$	3,209	$	1	$	3,210

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		Six Months Ended June 30, 2020
		Compared with
		Six Months Ended June 30, 2019
		Change Due To:				Interest
(dollars in thousands)		Volume		Rate		Variance
Interest Earning Assets:
Cash Investments		50		(212)		(162)
Investment Securities:
Taxable Investment Securities		778		(118)		660
Tax Exempt Investment Securities		(288)		32		(256)
Total Securities		490		(86)		404
Loans:
Paycheck Protection Program Loans		873		—		873
Loans		6,494		(1,774)		4,720
Total Loans		7,367		(1,774)		5,593
Federal Home Loan Bank Stock		59		(34)		25
Total Interest Earning Assets	$	7,966	$	(2,106)	$	5,860

Interest Bearing Liabilities:
Interest Bearing Transaction Deposits	$	213	$	(24)	$	189
Savings and Money Market Deposits		645		(1,117)		(472)
Time Deposits		464		(166)		298
Brokered Deposits		(91)		(753)		(844)
Total Deposits		1,231		(2,060)		(829)
Federal Funds Purchased		(9)		(56)		(65)
Notes Payable		(36)		11		(25)
FHLB Advances		636		(147)		489
Subordinated Debentures		106		(4)		102
Total Interest Bearing Liabilities		1,928		(2,256)		(328)
Net Interest Income	$	6,038	$	150	$	6,188

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

Second Quarter of 2020 Compared to Second Quarter of 2019

Net interest income was $21.3 million for the second quarter of 2020, an increase of $3.2 million, or 17.7%, compared to $18.1 million for the second quarter of 2019. The increase in net interest income was primarily attributed to growth in average interest earning assets due to organic growth in the loan portfolio. The Company anticipates that its interest income will be adversely affected in future periods as a result of the COVID-19 pandemic and the effects of lower interest rates.

Net interest margin (on a fully tax-equivalent basis) for the second quarter of 2020 was 3.38%, a 22 basis point decrease from 3.60% in the second quarter of 2019. While the Company is encouraged by the continued reduction in the cost of interest bearing liabilities during the second quarter of 2020, the year-over-year decrease in net interest margin was primarily attributed to a meaningful increase in on-balance sheet liquidity in conjunction with the historically low and flat yield curve weighing on subsequent earning asset yields. Furthermore, the Company’s participation in the PPP generated strong loan origination volume during the second quarter of 2020; however, the interest rate of 1.00% earned on these loans is significantly lower than the aggregate loan yield, thus impacting the net interest margin during the quarter. The core net interest margin, excluding PPP loans and corresponding deposit balances, was 3.43% for the second quarter of 2020. As a result of the low interest rate environment, as well as the impact of the COVID-19 pandemic, the Company expects that its net interest margin will continue to be under pressure in future periods.

Average interest earning assets for the second quarter of 2020 increased $521.7 million, or 25.5%, to $2.57 billion, from $2.05 billion for the second quarter of 2019. This increase in average interest earning assets was primarily

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due to continued organic growth in the loan portfolio and the funding of PPP loans. Average interest bearing liabilities increased $311.4 million, or 21.8%, to $1.74 billion for the second quarter of 2020, from $1.43 billion for the second quarter of 2019. The increase in average interest bearing liabilities was primarily due to an increase in interest bearing deposits and FHLB advances, offset partially by a decrease in federal funds purchased and notes payable.

Average interest earning assets produced a tax-equivalent yield of 4.45% for the second quarter of 2020, compared to 5.05% for the second quarter of 2019. The decrease in the yield on interest earning assets was a function of the historically low yield curve combined with the Company’s deliberate shift to a more liquid balance sheet composition given the uncertain economic environment. The average rate paid on interest bearing liabilities was 1.58% for the second quarter of 2020, compared to 2.07% for the second quarter of 2019, which benefited from the falling interest rate environment.

Interest Income. Total interest income on a tax-equivalent basis was $28.4 million for the second quarter of 2020, compared to $25.8 million for the second quarter of 2019. The $2.7 million, or 10.3%, increase in total interest income on a tax-equivalent basis was primarily due to continued organic growth in the loan portfolio.

Interest income on loans, on a tax-equivalent basis, for the second quarter of 2020 was $25.9 million, compared to $23.3 million for the second quarter of 2019. The $2.6 million, or 11.2%, increase was due to a 22.6% increase in the average balance of loans outstanding due to continued organic loan growth, which included $180.2 million of PPP loans.

Loan interest income and loan fees remain the primary contributing factors to the changes in yield on interest earning assets. The aggregate loan yield, excluding PPP loans, decreased to 5.01% in the second quarter of 2020, which is 32 basis points lower than 5.33% in the second quarter of 2019. While loan fees have maintained a stable contribution to aggregate loan yield, the historically low and flat yield curve has resulted in a declining core yield on loans in comparison to prior periods.

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


	Three Months Ended
	June 30, 2020		March 31, 2020		December 31, 2019		September 30, 2019		June 30, 2019
Interest	4.76	%	4.90	%	5.00	%	5.07	%	5.10	%
Fees	0.25		0.27		0.33		0.25		0.23
Yield on Loans, Excluding PPP	5.01	%	5.17	%	5.33	%	5.32	%	5.33	%

Interest Expense. Interest expense on interest bearing liabilities decreased $558,000, or 7.6%, to $6.8 million for the second quarter of 2020, compared to $7.4 million for the second quarter of 2019. The cost of interest bearing liabilities declined 49 basis points from 2.07% in the second quarter of 2019 to 1.58% in the second quarter of 2020. Given the strong deposit growth and ample time deposit maturities over the next 12 months, the Company anticipates meaningful deposit repricing opportunities in future quarters. Furthermore, the Company will continue to evaluate strategies similar to a recent action that involved prepaying $25.0 million of long term FHLB advances, with a blended 2.89% cost, and supplementing with much lower cost core deposits.

Interest expense on deposits was $5.2 million for the second quarter of 2020, compared to $6.0 million for the second quarter of 2019. The $850,000, or 14.1%, decrease in interest expense on deposits was primarily due to a 54 basis point decrease in the average rate paid on interest bearing deposits. The average balance of interest bearing deposits increased $246.5 million, or 19.6%, to $1.50 billion in the second quarter of 2020, compared to $1.26 billion for the second quarter of 2019. The increase in the average balance of interest bearing deposits resulted from growth among all interest bearing deposit types over the year. The average rate paid on interest bearing deposits decreased from 1.92% in the second quarter of 2019 to 1.38% in the second quarter of 2020. The decrease in the average rate paid was primarily due to the decline of market interest rates.

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Interest expense on borrowings increased $294,000 to $1.7 million for the second quarter of 2020, compared to $1.4 million for the second quarter of 2019. This increase was primarily due to increased average balances of FHLB advances and subordinated debentures, partially offset by decreases in average rate paid on borrowings.

Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019

Net interest income was $41.4 million for the six months ended June 30, 2020, an increase of $6.2 million, or 17.5%, compared to $35.3 million for the six months ended June 30, 2019. The increase in net interest income was primarily attributable to growth in average interest earning assets due to organic growth in the loan portfolio. The Company anticipates that its interest income will be adversely affected in future periods as a result of the COVID-19 pandemic and the effects of lower interest rates.

Net interest margin (on a fully tax-equivalent basis) for the six months ended June 30, 2020 was 3.48%, compared to 3.57% for the six months ended June 30, 2019, a decrease of 9 basis points. Despite a significant reduction in interest bearing liability costs over the year, the historically low interest rate environment, coupled with a more liquid balance sheet mix, pressured earning asset yields lower and ultimately compressed the net interest margin year-over-year.

Average interest earning assets for the six months ended June 30, 2020 increased $403.2 million, or 20.0%, to $2.42 billion from $2.02 billion for the six months ended June 30, 2019. This increase in average interest earning assets was due to continued organic growth in the loan portfolio. Average interest bearing liabilities increased $257.6 million, or 18.2%, to $1.67 billion for the six months ended June 30, 2020, from $1.42 billion for the six months ended June 30, 2019. The increase in average interest bearing liabilities was primarily due to an increase in interest bearing deposits and FHLB advances, offset partially by a decrease in brokered deposits, federal funds purchased and notes payable.

Average interest earning assets produced a tax-equivalent yield of 4.66% for the six months ended June 30, 2020, compared to 5.02% for the six months ended June 30, 2019. The average rate paid on interest bearing liabilities was 1.70% for the six months ended June 30, 2020, compared to 2.07% for the six months ended June 30, 2019.

Interest Income. Total interest income on a tax-equivalent basis was $56.1 million for the six months ended June 30, 2020, compared to $50.3 million for the six months ended June 30, 2019. The $5.9 million, or 11.7%, increase in total interest income on a tax-equivalent basis was primarily due to organic growth in the loan portfolio.

Interest income on the investment securities portfolio on a fully-tax equivalent basis increased $405,000, or 9.4%, during the six months ended June 30, 2020 compared to the six months ended June 30, 2019, due to a $42.7 million, or 17.3%, increase in average balances between the periods, which was offset partially by a 24 basis point decrease in the aggregate portfolio yield.

Interest income on loans for the six months ended June 30, 2020 was $51.1 million, compared to $45.5 million for the six months ended June 30, 2019. The $5.6 million, or 12.3%, increase was primarily due to a 18.6% increase in the average balance of loans outstanding, which was offset partially by a 30 basis point decrease in the average yield on loans. The increase in the average balance of loans outstanding was due to organic loan growth. The decrease in yield on the loan portfolio was primarily driven by lower market interest rates.

Interest Expense. Interest expense on interest bearing liabilities decreased $328,000, or 2.3%, to $14.2 million for the six months ended June 30, 2020, compared to $14.5 million for the six months ended June 30, 2019, due to lower interest rates paid on both deposits and borrowings.

Interest expense on deposits decreased to $10.9 million for the six months ended June 30, 2020, compared to $11.7 million for the six months ended June 30, 2019. The $829,000, or 7.1%, decrease in interest expense on deposits was primarily due to a 39 basis point decrease in the average rate paid, even as the average balance of deposits increased 16.3%. The decrease in the average rate paid was primarily due to the impact of lower market interest rates. The increase in the average balance of interest bearing deposits resulted primarily from increases in interest bearing transaction deposits and savings and money market deposits.

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Interest expense on borrowings increased $501,000 to $3.3 million for the six months ended June 30, 2020, compared to $2.8 million for the six months ended June 30, 2019. This increase was primarily due to a higher average balance of FHLB advances.

Provision for Loan Losses

The provision for loan losses was $3.0 million for the second quarter of 2020, an increase of $2.4 million, compared to the provision for loan losses of $600,000 for the second quarter of 2019. The provision for loan losses was $5.1 million for the six months ended June 30, 2020, an increase of $3.9 million compared to the provision for loan losses of $1.2 million for the six months ended June 30, 2019. The increase in the provision for loan losses compared to both prior periods relates to changes in economic conditions and evolving risks identified in certain commercial sectors driven by the impact of the COVID-19 pandemic. The Company expects the provision for loan losses to increase in future periods based on its belief that the credit quality of its loan portfolio will decline, and loan defaults will increase as a result of the COVID-19 pandemic.

The allowance for loan losses to total gross loans was 1.26% at June 30, 2020, compared to 1.20% at June 30, 2019. The allowance for loan losses to total loans, excluding $180.2 million of PPP loans, was 1.37% at June 30, 2020.

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

The following table presents the activity in the allowance for loan losses for the three and six month periods ended June 30, 2020 and 2019:


	Three Months Ended				Six Months Ended
	June 30,		June 30,		June 30,		June 30,
(dollars in thousands)	2020		2019		2020		2019
Balance at Beginning of Period	$	24,585	$	20,607	$	22,526	$	20,031
Provision for Loan Losses		3,000		600		5,100		1,200
Charge-offs		(1)		(3)		(48)		(39)
Recoveries		49		158		55		170
Balance at End of Period	$	27,633	$	21,362	$	27,633	$	21,362

Noninterest Income

Noninterest income was $2.0 million for the second quarter of 2020, an increase of $843,000, compared to $1.1 million for the second quarter of 2019. The increase was due to increased gains on sales of securities and letter of credit fees. Noninterest income was $3.7 for the six months ended June 30, 2020, an increase of $1.9 million, compared to $1.8 million for the six months ended June 30, 2019. The increase was primarily due to increased gains on sales of securities and swap fees.

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The following table presents the major components of noninterest income for the three and six months ended June 30, 2020, compared to the three and six months ended June 30, 2019:


	Three Months Ended						Six Months Ended
	June 30,				Increase/		June 30,				Increase/
(dollars in thousands)	2020		2019		(Decrease)		2020		2019		(Decrease)
Noninterest Income:
Customer Service Fees	$	135	$	189	$	(54)	$	375	$	380	$	(5)
Net Gain on Sales of Securities		1,361		463		898		1,364		458		906
Letter of Credit Fees		265		213		52		539		459		80
Debit Card Interchange Fees		99		109		(10)		191		197		(6)
Swap Fees		—		—		—		907		—		907
Other Income		117		160		(43)		320		274		46
Totals	$	1,977	$	1,134	$	843	$	3,696	$	1,768	$	1,928

Noninterest Expense

Second Quarter of 2020 Compared to Second Quarter of 2019

Noninterest expense was $10.7 million for the second quarter of 2020, an increase of $1.2 million, or 13.1%, from $9.5 million for the second quarter of 2019. The increase was primarily driven by a $1.2 million increase in salaries and employee benefits as the result of merit increases and increased staff to meet the needs of the Company’s growth and a $1.4 million one-time charge that resulted from the early extinguishment of $25.0 million of FHLB advances. The increase was partially offset by a decrease of $1.0 million in amortization of tax credit investments and other general decreases in operating expenses due to the COVID-19 pandemic, mainly marketing and advertising expenses.

Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019

Noninterest expense was $20.5 million for the six months ended June 30, 2020, an increase of $3.1 million, or 17.8%, from $17.4 million for the six months ended June 30, 2019. The increase was primarily driven by a $2.9 million increase in salaries and employee benefits and a $1.4 million one-time FHLB advance prepayment fee. The increase was partially offset by a decrease of $1.1 million in amortization of tax credit investments.

The Company expects future increases in noninterest expense as the Company continues investing in infrastructure to support balance sheet growth; particularly occupancy and equipment expense as the corporate headquarters nears completion. Management remains focused on supporting growth primarily by adding to staff, investing in technology, and by enhancing risk controls. Full-time equivalent employees increased from 150 at the end of the second quarter of 2019 to 173 at the end of the second quarter of 2020. The increase includes key strategic hires in deposit gathering, lending, risk management, and other supportive roles.

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

The efficiency ratio was 48.6% for the second quarter of 2020, compared to 50.1% for the second quarter of 2019. While the recognition of the tax credits increases operating expenses, and concurrently the efficiency ratio, it directly reduces income tax expense and the effective tax rate. The adjusted efficiency ratio, which excludes the impact of the amortization of tax credit investments and certain non-routine income and expenses, decreased to 40.4% for the second quarter of 2020, compared to 42.7% for the second quarter of 2019. The adjusted efficiency ratio for the six months ended June 30, 2020 and 2019 was 42.2% and 42.9%, respectively. Management seeks to contain costs whenever prudent, which is evident in the historical stability of the adjusted efficiency ratio.

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The following table presents the major components of noninterest expense for the three and six months ended June 30, 2020, compared to the three and six months ended June 30, 2019:


	Three Months Ended						Six Months Ended
	June 30,				Increase/		June 30,				Increase/
(dollars in thousands)	2020		2019		(Decrease)		2020		2019		(Decrease)
Noninterest Expense:
Salaries and Employee Benefits	$	6,348	$	5,124	$	1,224	$	12,802	$	9,926	$	2,876
Occupancy and Equipment		672		785		(113)		1,385		1,441		(56)
FDIC Insurance Assessment		168		285		(117)		358		570		(212)
Data Processing		238		151		87		467		304		163
Professional and Consulting Fees		423		451		(28)		908		839		69
Information Technology and Telecommunications		326		208		118		592		444		148
Marketing and Advertising		85		404		(319)		551		869		(318)
Intangible Asset Amortization		47		47		—		95		95		—
Amortization of Tax Credit Investments		362		1,390		(1,028)		447		1,567		(1,120)
FHLB Advance Prepayment Fees		1,430		—		1,430		1,430		—		1,430
Other Expense		612		629		(17)		1,422		1,304		118
Totals	$	10,711	$	9,474	$	1,237	$	20,457	$	17,359	$	3,098

Three Months Ended

March 31,

Increase/
(dollars in thousands)

2018

2017

(Decrease)
Noninterest Income:

Customer Service Fees

$
170

$
152

$
18
Net Gain on Sales of Securities

—

31

(31)
Net Gain on Sales of Foreclosed Assets

4

39

(35)
Letter of Credit Fees

70

126

(56)
Debit Card Interchange Fees

92

93

(1)
Other Income

51

39

12
Totals

$
387

$
480

$
(93)

~~Noninterest Expense~~

Noninterest expense was $6.5 million for the first quarter of 2018, an increase of $1.3 million, or 24.3%, from $5.3 million for the first quarter of 2017. The increase was primarily driven by a $1.2 million increase in salaries and employee benefits as a result of merit increases and increased staff to meet the needs of the Company’s growing infrastructure. The increase was partially offset by a decrease in data processing expenses primarily due to one-time credits provided by the data processor. The following table presents the major components of noninterest expense for the first quarter of 2018, compared to the first quarter of 2017:

Three Months Ended

March 31,

Increase/
(dollars in thousands)

2018

2017

(Decrease)
Noninterest Expense:

Salaries and Employee Benefits

$
4,318

$
3,168

$
1,150
Occupancy and Equipment

574

549

25
FDIC Insurance Assessment

270

255

15
Data Processing

32

194

(162)
Professional and Consulting Fees

301

228

73
Information Technology and Telecommunications

183

167

16
Marketing and Advertising

284

254

30
Intangible Asset Amortization

48

48

—
Other Expense

522

391

131
Totals

$
6,532

$
5,254

$
1,278

The Company expects future increases in noninterest expense as the Company continues investment in infrastructure to support strong asset 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. The Company’s success in this regard is evident in the stable nature of the efficiency ratio, a non-GAAP financial measure which measures operating expenses as a percentage of net revenue. The efficiency ratio was 42.8% for the first quarter of 2018, compared to 41.2% for the first quarter of 2017.

Income Tax Expense

The provision for income taxes includes both federal and state taxes. Fluctuations in effective tax rates reflect the ~~effect of the~~ differences in the inclusion or deductibility of certain income and expenses for income tax ~~purposes.~~

35

~~Table~~purposes and the recognition of ~~Contents~~

tax credits. The Company’s future effective income tax rate will fluctuate based on the mix of taxable and tax-free investments and loans, the recognition and availability of tax credit investments, and overall taxable income.

Income tax expense was ~~$2.1~~$2.0 million for the ~~first~~second quarter of ~~2018,~~2020, compared to ~~$2.4~~$1.2 million for the ~~first~~second quarter of ~~2017.~~2019. The effective combined federal and state income tax rate for the ~~first~~second quarter of ~~2018~~2020 was ~~25.8%~~20.9%, compared to ~~36.9%~~12.9% for the ~~first~~second quarter of ~~2017. The decrease in~~2019. Income tax expense ~~despite~~was $4.5 million for the ~~increase in pre-tax net~~six months ended June 30, 2020, compared to $3.5 million for the six months ended June 30, 2019. The effective combined federal and state income ~~was the result of enactment of the Tax Cuts and Jobs Act on December 22, 2017. This legislation reduced the federal corporate~~ tax rate ~~from 35% in~~for the six months ended June 30, 2020 and 2019 was 23.2% and 18.7%, respectively. The higher effective combined rate compared to both prior periods ~~prior~~was due to ~~2018 to 21% starting in 2018.~~fewer tax credits being recognized.

Financial Condition

Assets

Total assets at ~~March 31, 2018~~June 30, 2020 were ~~$1.68~~$2.75 billion, an increase of ~~$65.0~~$485.6 million, or ~~4.0%~~21.4%, over total assets of ~~$1.62~~$2.27 billion at December 31, ~~2017~~2019 and an increase of ~~$327.2~~$630.8 million, or ~~24.2%~~29.7%, over total assets of ~~$1.35~~$2.12 billion at ~~March 31, 2017.~~June 30, 2019. The growth in both periods was primarily driven by organic growth in the loan portfolio, which included $180.2 million of PPP loans, and higher levels of on-balance sheet liquidity.

Investment Securities Portfolio

The investment securities portfolio is used to make various term investments ~~maintain~~and is intended to provide the Company with adequate liquidity, a source of ~~liquidity~~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 ~~all available sources of credits and~~ are maintained at levels management believes are appropriate to ~~assure~~ensure future flexibility in meeting anticipated funding needs.

The investment securities portfolio consists primarily of municipal securities, U.S. government agency mortgage backed securities, ~~and Small Business Administration, or~~ SBA securities, ~~although~~and corporate securities comprised of subordinated debentures of bank and

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financial holding companies. In addition, the Company also holds ~~corporate~~U.S. treasury securities, asset-backed securities and other debt securities, all with varying contractual maturities. ~~However, these~~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 ~~$236.8~~$326.3 million at ~~March 31, 2018,~~June 30, 2020, compared to ~~$229.5~~$289.9 million at December 31, ~~2017,~~2019, an increase of ~~$7.3~~$36.4 million or ~~3.2%~~12.6%. At ~~March 31, 2018,~~June 30, 2020, municipal securities represented ~~50.6%~~30.9% of the investment securities portfolio, government agency mortgage-backed securities represented ~~25.1%~~28.7% of the ~~investment securities~~ portfolio, SBA securities represented ~~20.6%~~13.5% of the ~~investment securities~~ portfolio, corporate securities represented ~~3.0%~~17.0% of the ~~investment~~portfolio, asset-backed securities represented 9.6% of the portfolio, and other mortgage-backed securities represented ~~0.7%~~0.3% of the ~~investment securities~~ portfolio.

The following table presents the amortized cost and fair value of securities available for sale, by type, at ~~March 31, 2018~~June 30, 2020 and December 31, ~~2017:~~2019:


	March 31, 2018					December 31, 2017
	Amortized		Fair			Amortized		Fair
	Cost		Value			Cost		Value

										June 30, 2020				December 31, 2019
										Amortized		Fair		Amortized		Fair
										Cost		Value		Cost		Value
U.S. Treasury Securities										$	—	$	—	$	4,990	$	4,998
SBA Securities	$	49,076	$	48,782	$		45,368	$	45,383		44,599		44,054		50,126		49,559
Mortgage-Backed Securities Issued or Guaranteed by U.S. Agencies (MBS):
Residential Pass-Through:
Guaranteed by GNMA		6,916		6,693			7,080		6,940		1,058		1,122		1,195		1,215
Issued by FNMA and FHLMC		10,591		10,505			11,340		11,272		6,509		6,592		3,571		3,543
Other Residential Mortgage-Backed Securities		29,703		28,681			29,516		28,834		72,653		73,546		46,464		46,695
Commercial Mortgage-Backed Securities		14,088		13,372			12,121		11,748		11,675		12,456		12,019		12,213
All Other Commercial MBS		1,775		1,775			1,888		1,887		905		908		1,063		1,062
Total MBS		63,073		61,026			61,945		60,681		92,800		94,624		64,312		64,728
Municipal Securities		120,457		119,937			115,784		118,320		93,780		100,722		99,441		105,743
Corporate Securities		7,019		7,074			5,052		5,107		55,258		55,630		49,674		50,176
Asset-Backed Securities											31,437		31,265		14,673		14,673
Total	$	239,625	$	236,819		$	228,149	$	229,491	$	317,874	$	326,295	$	283,216	$	289,877

36

~~Table of Contents~~

Loan Portfolio

The Company focuses on lending to borrowers located or investing in the Minneapolis-St. Paul-Bloomington, MN-WI Metropolitan Statistical Area across a diverse range of industries and property types. The Company lends primarily to commercial customers, consisting of loans secured by nonfarm, nonresidential properties, ~~loans secured by~~ multifamily residential properties, ~~construction loans,~~ land, ~~development loans,~~ and ~~commercial~~non-real estate business assets. Responsive service, local decision making, and ~~industrial loans.~~ 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~~risk management program which implements formalized processes and procedures specifically for managing and mitigating risk within the loan portfolio. The processes and procedures include board and management oversight, commercial real estate exposure limits, portfolio monitoring tools, management information systems, market reports, underwriting standards, ~~a credit risk~~internal and external loan review, ~~function~~ and ~~periodic~~ stress ~~testing~~testing.

The Company originated net loan exposures of $242.7 million, excluding PPP loans, for the second quarter of 2020, compared to ~~evaluate potential credit risk~~$266.4 million for the second quarter of 2019. Net loan exposures include principal advances and ~~the subsequent impact on capital and earnings.~~

unfunded commitments, net of loan participations sold. Total gross loans increased ~~$58.3~~$281.7 million, or ~~4.3%~~14.7%, to ~~$1.41~~$2.19 billion at ~~March 31, 2018,~~June 30, 2020, compared to ~~$1.35~~$1.91 billion at December 31, ~~2017~~2019 and increased ~~$320.7~~$408.9 million, or ~~29.6%~~22.9%, from ~~$1.08~~$1.78 billion at ~~March 31, 2017.~~June 30, 2019. The ~~Company’s annualized loan growth for~~increase in both periods included $180.2 million of PPP loans funded in the ~~first~~second quarter of ~~2018 was 17.3%.~~2020. The ~~multifamily, construction and land development,~~commercial, 1-4 family mortgage, and commercial real estate, ~~(“CRE”)~~or CRE, nonowner occupied categories contributed most significantly to the ~~$58.3~~$101.5 million net loan growth, excluding PPP loans, in the ~~first quarter~~six months

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Table of ~~2018.~~Contents

ended June 30, 2020. As of ~~March 31, 2018, multifamily~~June 30, 2020, commercial loans increased ~~$14.9~~$26.5 million, or ~~4.7%~~9.6%, 1-4 family mortgage loans increased $28.8 million, or 11.1%, and nonowner occupied ~~commercial real estate~~CRE loans increased ~~$38.5, or 9.3%, and construction and land development loans increased $17.3~~$35.1 million, or ~~13.2%~~5.9%, when compared to December 31, ~~2017.~~2019. Collectively, the Company’s annualized loan growth for the six months ended June 30, 2020 was 10.6%. The Company anticipates that its loan growth will slow in the future as a result of the COVID-19 pandemic and the related decline in economic conditions in its market area.

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


	March 31, 2018				December 31, 2017				March 31, 2017


													June 30, 2020				March 31, 2020				December 31, 2019				September 30, 2019				June 30, 2019
													Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent
(dollars in thousands)	Amount		Percent		Amount		Percent		Amount		Percent

Commercial and Industrial	$	199,262	14.2	%	$	217,753	16.2	%	$	140,753	13.0	%
Commercial													$	302,536	13.8	%	$	299,425	15.0	%	$	276,035	14.5	%	$	291,723	15.8	%	$	287,804	16.1	%
Paycheck Protection Program														180,228	8.2			—	—			—	—			—	—			—	—
Construction and Land Development		147,842	10.5			130,586	9.7			113,381	10.5			191,768	8.7			183,350	9.2			196,776	10.3			216,054	11.7			195,568	11.0
Real Estate Mortgage:
1 - 4 Family Mortgage		200,573	14.3			195,707	14.5			181,920	16.8			289,456	13.2			272,590	13.6			260,611	13.6			254,782	13.8			247,029	13.8
Multifamily		332,770	23.7			317,872	23.6			253,665	23.4			522,491	23.8			536,380	26.8			515,014	26.9			456,257	24.7			437,198	24.5
CRE Owner Occupied		67,512	4.8			65,909	4.9			62,867	5.8			73,539	3.4			75,207	3.8			66,584	3.5			71,209	3.9			68,681	3.9
CRE Nonowner Occupied		453,498	32.3			415,034	30.8			327,903	30.2			627,651	28.6			631,541	31.4			592,545	31.0			551,992	29.9			544,579	30.5
Total Real Estate Mortgage Loans		1,054,353	75.0			994,522	73.8			826,355	76.2			1,513,137	69.0			1,515,718	75.6			1,434,754	75.0			1,334,240	72.3			1,297,487	72.7
Consumer and Other		3,963	0.3			4,252	0.3			4,263	0.4			6,109	0.3			4,324	0.2			4,473	0.2			4,201	0.2			4,044	0.2
Total Loans, Gross		1,405,420	100	%		1,347,113	100	%		1,084,752	100	%		2,193,778	100.0	%		2,002,817	100.0	%		1,912,038	100.0	%		1,846,218	100.0	%		1,784,903	100.0	%
Allowance for Loan Losses		(17,121)				(16,502)				(13,216)				(27,633)				(24,585)				(22,526)				(22,124)				(21,362)
Net Deferred Loan Fees		(4,130)				(4,104)				(3,494)				(10,287)				(5,336)				(5,512)				(5,788)				(5,157)
Total Loans, Net	$	1,384,169			$	1,326,507			$	1,068,042			$	2,155,858			$	1,972,896			$	1,884,000			$	1,818,306			$	1,758,384

The Company’s primary focus has been on real estate mortgage lending, which constituted ~~75.0%~~75.2% of the portfolio, excluding PPP loans, as of ~~March 31, 2018.~~June 30, 2020. The composition of the portfolio has 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 ~~March 31, 2018, commercial real estate, or~~June 30, 2020, investor CRE loans totaled ~~$934.1 million,~~$1.34 billion, consisting of ~~$453.5~~$627.7 million of loans secured by nonowner occupied ~~commercial real estate, $332.8~~CRE, $522.5 million of loans secured by multifamily residential properties and ~~$147.8~~$191.8 million of construction and land development loans. ~~Commercial real estate~~Investor CRE loans represented ~~66.5%~~66.6% of the total gross loan portfolio, excluding PPP loans, and ~~459.0%~~429.6% of the Bank’s ~~Total Capital~~total risk-based capital at ~~March~~June 30, 2020, compared to 516.6% at December 31, ~~2018.~~

2019.

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The following table ~~details maturities~~presents time to contractual maturity and sensitivity to interest rate changes for the loan portfolio at ~~March 31, 2018~~June 30, 2020 and December 31, ~~2017:~~2019:


	As of March 31, 2018
	Due in One Year		More Than One

							As of June 30, 2020
							Due in One Year		More Than One
(dollars in thousands)	or Less		Year to Five Years		After Five Years		or Less		Year to Five Years		After Five Years
Commercial and Industrial	$	99,066	$	70,665	$	29,531
Commercial							$	131,348	$	132,948	$	38,240
Paycheck Protection Program								—		180,228		—
Construction and Land Development		100,323		40,000		7,519		105,646		57,094		29,028
Real Estate Mortgage:
1 - 4 Family Mortgage		49,385		128,553		22,635		64,218		184,587		40,651
Multifamily		11,822		101,970		218,978		67,960		198,424		256,107
CRE Owner Occupied		6,603		31,851		29,058		15,556		17,596		40,387
CRE Nonowner Occupied		76,633		224,779		152,086		121,980		264,913		240,758
Total Real Estate Mortgage Loans		144,443		487,153		422,757		269,714		665,520		577,903
Consumer and Other		1,464		2,421		78		2,745		2,564		800
Total Loans, Gross	$	345,296	$	600,239	$	459,885	$	509,453	$	1,038,354	$	645,971
Interest Rate Sensitivity:
Fixed Interest Rates	$	137,598	$	476,306	$	117,006	$	168,007	$	827,083	$	246,059
Floating or Adjustable Rates		207,698		123,933		342,879		341,446		211,271		399,912
Total Loans, Gross	$	345,296	$	600,239	$	459,885	$	509,453	$	1,038,354	$	645,971


	As of December 31, 2017
	Due in One Year		More Than One

							As of December 31, 2019
							Due in One Year		More Than One
(dollars in thousands)	or Less		Year to Five Years		After Five Years		or Less		Year to Five Years		After Five Years
Commercial and Industrial	$	119,225	$	73,093	$	25,435
Commercial							$	121,383	$	119,575	$	35,077
Construction and Land Development		97,183		29,074		4,329		132,221		53,194		11,361
Real Estate Mortgage:
1 - 4 Family Mortgage		47,587		125,890		22,230		53,707		170,116		36,788
Multifamily		11,869		91,778		214,225		117,406		168,770		228,838
CRE Owner Occupied		7,252		29,363		29,294		4,078		25,286		37,220
CRE Nonowner Occupied		71,330		206,873		136,831		114,533		234,599		243,413
Total Real Estate Mortgage Loans		138,038		453,904		402,580		289,724		598,771		546,259
Consumer and Other		764		3,426		62		1,589		2,420		464
Total Loans, Gross	$	355,210	$	559,497	$	432,406	$	544,917	$	773,960	$	593,161
Interest Rate Sensitivity:
Fixed Interest Rates	$	144,115	$	430,496	$	111,939	$	184,370	$	545,855	$	197,151
Floating or Adjustable Rates		211,095		129,001		320,467		360,547		228,105		396,010
Total Loans, Gross	$	355,210	$	559,497	$	432,406	$	544,917	$	773,960	$	593,161

Asset Quality

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

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

38

~~Table of Contents~~

~~“uncollectible”~~ “uncollectible” and of such little value

55

Table of Contents

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

The following table presents information on loan classifications at ~~March 31, 2018.~~June 30, 2020. The Company had no assets classified as doubtful or loss.


	Risk Category

							Risk Category
(dollars in thousands)	Watch		Substandard		Total		Watch		Substandard		Total
Commercial and Industrial	$	1,840	$	21	$	1,861
Commercial							$	21,515	$	254	$	21,769
Construction and Land Development		1,729		575		2,304		132		164		296
Real Estate Mortgage:
1 - 4 Family Mortgage		500		1,931		2,431		1,497		1,229		2,726
Multifamily		—		65		65		—		—		—
CRE Owner Occupied		5,124		2,574		7,698		818		1,840		2,658
CRE Non-owner Occupied		3,280		—		3,280
CRE Nonowner Occupied								21,689		220		21,909
Total Real Estate Mortgage Loans		8,904		4,570		13,474		24,004		3,289		27,293
Consumer and Other		—		70		70		—		33		33
Totals	$	12,473	$	5,236	$	17,709	$	45,651	$	3,740	$	49,391

The Company is closely analyzing all segments within the loan portfolio in response to the COVID-19 pandemic and although the Company has not seen direct impacts to the asset quality metrics through June 30, 2020, management believes the economic uncertainty that exists may begin to negatively impact the portfolio in future quarters. At June 30, 2020, watchlist loans were $45.7 million, compared to $5.3 million at December 31, 2019. Due to management’s diligent action in identifying watchlist loans during the first quarter of 2020, there were no additional loans added to the watchlist in the second quarter of 2020. As the COVID-19 pandemic continues to evolve, the length and extent of the economic contraction may dictate further watchlist or adverse classifications in the loan portfolio.

In response to the COVID-19 pandemic, the Company is offering loan modifications, when appropriate, to borrowers who were current and otherwise not past due as of December 31, 2019. These include modifications in the form of payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment. In accordance with interagency regulatory guidance and the CARES Act, these modifications are not considered to be TDRs.

The following table presents a summary of closed loan modifications, by loan segment and modification type, as of June 30, 2020.


	Interest-Only			Payment Deferral			Total
	Amount		# of Loans	Amount		# of Loans	Amount		# of Loans
(dollars in thousands)
Commercial	$	17,615	36	$	13,355	14	$	30,970	50
Construction and Land Development		133	1		—	—		133	1
Real Estate Mortgage:
1 - 4 Family Mortgage		8,037	22		420	2		8,457	24
Multifamily		41,320	6		16,251	3		57,571	9
CRE Owner Occupied		7,397	14		1,502	3		8,899	17
CRE Nonowner Occupied		100,805	41		86,175	18		186,980	59
Consumer and Other		—	—		—	—		—	—
Totals	$	175,307	120	$	117,703	40	$	293,010	160

Modifications have been granted based on specific needs and circumstances affecting each borrower. Interest-only modifications have been primarily granted for three to six month periods, but range up to twelve months. Payment deferral modifications have been granted for three to six month periods. Management anticipates the loan modifications may continue throughout 2020.

Nonperforming Assets

Nonperforming loans include loans accounted for on a nonaccrual basis and loans 90 days past due and still accruing. Nonperforming assets consist of nonperforming loans plus foreclosed assets (i.e., real ~~estate~~ or personal property

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Table of Contents

acquired through foreclosure). Nonaccrual loans totaled $602,000 and $461,000 as of ~~March 31, 2018~~June 30, 2020 and December 31, ~~2017 totaled $1.1 million.~~2019, respectively, an increase of $141,000. There were no loans 90 days past due and still accruing as of ~~March 31, 2018~~June 30, 2020 or December 31, ~~2017.~~2019. There were no foreclosed assets as of June 30, 2020 and December 31, 2019.

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


	June 30,			December 31,
(dollars in thousands)	2020			2019
Nonaccrual Loans:
Commercial	$	7		$	7
Construction and Land Development		164			176
Real Estate Mortgage:
1 - 4 Family Mortgage		431			278
Total Nonaccrual Loans	$	602		$	461
Total Nonperforming Loans	$	602		$	461
Total Nonperforming Assets ⁽¹⁾	$	602		$	461
Total Restructured Accruing Loans		667			276
Total Nonperforming Assets and Restructured Accruing Loans	$	1,269		$	737
Nonaccrual Loans to Total Loans		0.03	%		0.02	%
Nonperforming Loans to Total Loans		0.03			0.02
Nonperforming Assets to Total Loans Plus Foreclosed Assets ⁽¹⁾		0.03			0.02
Nonperforming Assets and Restructured Accruing Loans to Total Loans Plus Foreclosed Assets		0.06			0.04

March 31,

December 31,

(dollars in thousands)

2018

2017

Nonaccrual Loans:





Commercial and Industrial

$
15

$
9

Construction and Land Development

575

583

Real Estate Mortgage:





1 - 4 Family Mortgage

468

472

Consumer and Other

70

75

Total Nonaccrual Loans

$
1,128

$
1,139

Total Nonperforming Loans

$
1,128

$
1,139

Plus: Foreclosed Assets

288

581

Total Nonperforming Assets (1)

$
1,416

$
1,720

Total Restructured Accruing Loans

2,161

2,178

Total Nonperforming Assets and Restructured Accruing Loans

$
3,577

$
3,898

Nonaccrual Loans to Total Loans

0.08
%

0.08
%
Nonperforming Loans to Total Loans

0.08

0.08

Nonperforming Assets to Total Loans Plus Foreclosed Assets (1)

0.10

0.13

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

0.25

0.29

(1)

~~(1)~~

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

39

~~Table of Contents~~

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~~Gross income that would have been recorded on nonaccrual loans ~~outside of those included in~~during for the ~~table above, that cause management to have serious doubts as to the ability of borrowers to comply with present repayment terms.~~three and six months ended June 30, 2020 was $16 and $31, respectively.

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.~~credited to the reserve. The Company analyzes risks within the loan portfolio on a ~~continuous~~continual basis. A risk system, consisting of multiple grading categories for each portfolio class, is utilized as an analytical tool to assess risk and appropriate reserves. In addition to the risk system, management further evaluates risk characteristics of the loan portfolio under current and anticipated economic conditions, including the economic distress caused by the COVID-19 pandemic, and considers such factors as the financial condition of the borrower, past and expected loss experience, and other factors which management feels deserve recognition in establishing an appropriate reserve. These estimates are reviewed at least quarterly, and as adjustments become necessary, they are recognized in the periods in which they become known. Although management strives to maintain an allowance it deems adequate, future economic changes, deterioration of borrowers’ creditworthiness, and the impact of examinations by regulatory agencies all could cause changes to the allowance for loan losses.

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Table of Contents

At ~~March 31, 2018,~~June 30, 2020, the allowance for loan losses was ~~$17.1~~$27.6 million, an increase of ~~$619,000~~$5.1 million from ~~$16.5~~$22.5 million at December 31, ~~2017.~~2019. Net charge-offs (recoveries) totaled ~~($19,000) (net recoveries)~~$(48,000) during the ~~first~~second quarter of ~~2018~~2020 and ~~$67,000~~$(155,000) during the ~~first~~second quarter of ~~2017.~~2019. Net charge-offs (recoveries) totaled $(7,000) for the six months ended June 30, 2020 and $(131,000) for the six months ended June 30, 2019. The allowance for loan losses as a percentage of total loans was ~~1.22% at March 31, 2018~~1.26% as of June 30, 2020 and 1.18% as of December 31, ~~2017.~~

40

~~Table~~2019. The allowance for loan losses to total loans, excluding $180.2 million of ~~Contents~~

PPP loans, was 1.37% as of June 30, 2020. Based on current economic indicators, the Company increased the economic factors within the allowance for loan losses evaluation. The Company expects that the allowance for loan losses as a percent of total loans will increase in future periods based on its belief that the credit quality of its loan portfolio will decline, and loan defaults will increase as a result of COVID-19.

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


	Three Months Ended						Six Months Ended
	June 30,						June 30,
(dollars in thousands)	2020			2019			2020			2019
Balance, Beginning of Period	$	24,585		$	20,607		$	22,526		$	20,031
Charge-offs:
Commercial		—			—			34			19
Consumer and Other		1			3			14			20
Total Charge-offs		1			3			48			39
Recoveries:
Commercial		2			1			4			3
Construction and Land Development		—			1			—			1
Real Estate Mortgage:
1 - 4 Family Mortgage		46			153			48			162
Consumer and Other		1			3			3			4
Total Recoveries		49			158			55			170
Net Recoveries		(48)			(155)			(7)			(131)
Provision for Loan Losses		3,000			600			5,100			1,200
Balance at End of Period	$	27,633		$	21,362		$	27,633		$	21,362
Gross Loans, End of Period		2,193,778			1,784,903			2,193,778			1,784,903
Average Loans		2,152,398			1,755,686			2,053,678			1,731,928
Net Charge-offs (Recoveries) (Annualized) to Average Loans		(0.01)	%		(0.04)	%		—	%		(0.02)	%
Allowance to Total Gross Loans		1.26	%		1.20	%		1.26	%		1.20	%

March 31,

(dollars in thousands)

2018

2017

Balance, Beginning of Period

$
16,502

$
12,333

Charge-offs:





Commercial and Industrial

—

1

Real Estate Mortgage:





CRE Nonowner Occupied

—

74

Total Real Estate Mortgage Loans

—

74

Consumer and Other

12

5

Total Charge-offs

12

80

Recoveries:





Commercial and Industrial

20

1

Construction and Land Development

—

2

Real Estate Mortgage:





1 - 4 Family Mortgage

10

10

Consumer and Other

1

—

Total Recoveries

31

13

Net Charge-offs

(19)

67

Provision for Loan Losses

600

950

Balance at End of Period

$
17,121

$
13,216

Gross Loans, End of Period

1,405,420

1,084,752

Average Loans

1,353,031

1,051,058

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

(0.01)
%

0.03
%
Allowance to Total Loans

1.22
%

1.22
%

58

Table of Contents

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


	March 31,				December 31,
	2018				2017

									June 30,				December 31,
									2020				2019
(dollars in thousands)	Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent
Commercial and Industrial	$	2,225	13.0	%	$	2,435	14.7	%
Commercial									$	5,192	18.8	%	$	3,058	13.6	%
Paycheck Protection Program										90	0.3			—	—
Construction and Land Development		1,765	10.3			1,892	11.5			2,173	7.9			2,202	9.8
Real Estate Mortgage:
1 - 4 Family Mortgage		2,418	14.1			2,317	14.0			3,322	12.0			2,839	12.6
Multifamily		3,476	20.3			3,170	19.2			6,697	24.3			5,824	25.9
CRE Owner Occupied		914	5.3			956	5.8			964	3.5			792	3.5
CRE Nonowner Occupied		5,407	31.6			5,087	30.8			8,323	30.1			6,972	30.9
Total Real Estate Mortgage Loans		12,215	71.3			11,530	69.9			19,306	69.9			16,427	72.9
Consumer and Other		50	0.3			60	0.4			174	0.6			85	0.4
Unallocated		866	5.1			585	3.6			698	2.5			754	3.3
Total Allowance for Loan Losses	$	17,121	100.0	%	$	16,502	100.0	%	$	27,633	100.0	%	$	22,526	100.0	%

41

~~Table of Contents~~

Deposits

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


	March 31, 2018					December 31, 2017				March 31, 2017

														June 30, 2020				March 31, 2020				December 31, 2019				September 30, 2019				June 30, 2019
(dollars in thousands)	Amount		Percent			Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent
Noninterest Bearing Transaction Deposits	$	315,036	23.3	%	��	$	292,539	21.9	%	$	322,563	28.2	%	$	648,869	28.9	%	$	476,217	25.1	%	$	447,509	24.5	%	$	478,493	26.5	%	$	409,198	24.1	%
Interest Bearing Transaction Deposits		164,899	12.2				177,292	13.2			123,151	10.8			285,386	12.7			255,483	13.4			264,627	14.5			243,889	13.5			231,318	13.6
Savings and Money Market Deposits		339,541	25.1				369,942	27.6			251,478	22.0			516,543	23.0			514,113	27.1			516,785	28.3			470,518	26.1			456,447	26.9
Time Deposits		304,743	22.5				292,096	21.8			286,051	25.1			382,187	17.1			393,340	20.7			360,027	19.8			363,308	20.2			359,338	21.1
Brokered Deposits		228,817	16.9				207,481	15.5			158,594	13.9			409,066	18.3			260,974	13.7			234,362	12.9			246,028	13.7			242,964	14.3
Total Deposits	$	1,353,036	100.0	%		$	1,339,350	100.0	%	$	1,141,837	100.0	%	$	2,242,051	100.0	%	$	1,900,127	100.0	%	$	1,823,310	100.0	%	$	1,802,236	100.0	%	$	1,699,265	100.0	%

Total deposits at ~~March 31, 2018~~June 30, 2020 were ~~$1.35~~$2.2 billion, an increase of ~~$13.7~~$418.7 million, or ~~1.0%~~23.0%, compared to total deposits of ~~$1.34~~$1.82 billion at December 31, ~~2017,~~2019, and an increase of ~~$211.2~~$542.8 million, or ~~18.5%~~31.9%, over total deposits of ~~$1.14~~$1.70 billion at ~~March 31, 2017.~~June 30, 2019. Noninterest bearing deposits were ~~$315.0~~$648.9 million at ~~March 31, 2018,~~June 30, 2020, compared to ~~$292.5~~$447.5 million at December 31, ~~2017,~~2019, and ~~$322.6~~$409.2 million at ~~March 31, 2017.~~June 30, 2019. Noninterest bearing deposits comprised ~~23.3%~~28.9% of total deposits at ~~March 31, 2018,~~June 30, 2020, compared to ~~21.9%~~24.5% at December 31, ~~2017,~~2019, and ~~28.2%~~24.1% at ~~March 31, 2017.~~June 30, 2019. The growth in noninterest bearing transaction deposits was primarily attributable to general increases in existing client accounts, as personal and business depositors elected to conserve cash liquidity amidst the ongoing COVID-19 pandemic. The Company estimates approximately $60.0 million of the noninterest bearing transaction deposit growth was due to remaining PPP loan funds. The Company expects that deposit levels will fluctuate in future periods as a result of the distressed economic conditions in its market areas relating to the COVID-19 pandemic.

The Company relies on increasing the deposit base to fund loans and other asset growth. The Company is in a highly competitive market and competes for local deposits by offering attractive products with competitive rates. The Company expects to have a higher average cost of funds for local deposits compared to competitor banks due to the lack of an extensive branch network. The Company’s strategy is to offset the higher cost of funding with a lower level of

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operating expense. When appropriate, the Company utilizes alternative funding sources such as brokered deposits. Additionally, the Company participates in the Certificates of Deposit Account Registry Service (“CDARS”) and the Insured Cash Sweep product (“ICS”), which provide for reciprocal transactions among banks facilitated by Promontory for the purpose of maximizing FDIC insurance for clients. These reciprocal CDARS and ICS funds are classified as brokered deposits. At ~~March 31, 2018,~~June 30, 2020, total brokered deposits were ~~$228.8~~$409.1 million, an increase of $174.7 million, or ~~16.9%~~74.5%, compared to total brokered deposits of ~~total deposits.~~$234.4 million at December 31, 2019. Brokered deposits increased as a result of a change in mix of wholesale funding sources due to favorable funding costs offered compared to other wholesale funding alternatives and to expand on-balance sheet liquidity in this uncertain environment. Furthermore, the brokered deposit market provides flexibility in structure, optionality and efficiency not afforded in traditional, retail deposit channels.

The following table presents the average balance and average rate paid on each of the following deposit categories for the ~~first quarter of 2018, year~~three months ended ~~December 31, 2017,~~June 30, 2020 and ~~first quarter of 2017:~~June 30, 2019:


	As of and for the				As of and for the				As of and for the
	Three Months Ended				Three Months Ended				Three Months Ended
	March 31, 2018				December 31, 2017				March 31, 2017
	Average		Average		Average		Average		Average		Average

													As of and for the				As of and for the
													Three Months Ended				Three Months Ended
													June 30, 2020				June 30, 2019
													Average		Average		Average		Average
(dollars in thousands)	Balance		Rate		Balance		Rate		Balance		Rate		Balance		Rate		Balance		Rate
Noninterest Bearing Transaction Deposits	$	295,587	—	%	$	296,018	—	%	$	286,833	—	%	$	603,456	—	%	$	401,480	—	%
Interest Bearing Transaction Deposits		168,509	0.27			176,067	0.26			127,346	0.25			272,565	0.56			202,886	0.77
Savings and Money Market Deposits		354,009	0.87			337,028	0.88			251,027	0.68			521,313	1.02			431,716	1.80
Time Deposits < $250,000		188,250	1.73			184,728	1.68			183,114	1.65			241,009	2.30			231,349	2.28
Time Deposits > $250,000		110,083	1.54			105,788	1.37			95,750	1.16			147,348	2.03			122,678	2.63
Brokered Deposits		211,058	1.76			216,044	1.55			153,412	1.34			319,711	1.69			266,804	2.37
Total Deposits	$	1,327,496	0.92	%	$	1,315,673	0.86	%	$	1,097,482	0.75	%	$	2,105,402	0.99	%	$	1,656,913	1.46	%

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~~Table of Contents~~

Borrowed Funds

Federal Funds Purchased

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


	As of and for the			As of and for the			As of and for the
	Three Months Ended			Three Months Ended			Three Months Ended

										As of and for the			As of and for the			As of and for the
										Three Months Ended			Three Months Ended			Three Months Ended
(dollars in thousands)	March 31, 2018			December 31, 2017			March 31, 2017			June 30, 2020			December 31, 2019			June 30, 2019
Outstanding at Period-End	$	9,000		$	23,000		$	13,000		$	—		$	—		$	—
Average Amount Outstanding		28,511			14,391			22,956			9			3,011			2,089
Maximum Amount Outstanding at any Month-End		34,000			23,000			39,000			—			6,000			8,000
Weighted Average Interest Rate:
During Period		1.68	%		1.41	%		0.87	%		0.72	%		1.82	%		2.24	%
End of Period		1.91	%		1.63	%		1.06	%		0.40	%		2.63	%		2.38	%

Other Borrowings

At ~~March 31, 2018,~~June 30, 2020, other borrowings outstanding consisted of FHLB advances of ~~$73.0~~$147.5 million and notes payable of ~~$16.5~~$12.0 million. During the second quarter of 2020, the Company paid off $25.0 million of fixed rate FHLB advances with an average cost of 2.89% and ~~subordinated debentures~~incurred a loss on extinguishment of ~~$25.0~~debt of $1.4 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 ~~$192.2~~$230.9 million and ~~$180.9~~ $209.8million at ~~March 31, 2018~~June 30, 2020 and December 31, ~~2017,~~2019, respectively, based on collateral amounts pledged.

Additionally, the Company has borrowing capacity from other sources. As of ~~March 31, 2018,~~June 30, 2020, the Bank was eligible to use the Federal Reserve discount window for borrowings. Based on assets ~~available for~~pledged as collateral as of the applicable date, the Bank’s borrowing availability was approximately ~~$34.7~~$107.6 million and ~~$37.5~~$113.2 million at ~~March 31, 2018~~

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June 30, 2020 and December 31, ~~2017,~~2019, respectively. As of ~~March 31, 2018~~June 30, 2020 and December 31, ~~2017,~~2019, the Company had no outstanding advances.

As a part of the CARES Act, the Federal Reserve Bank offered secured borrowings to banks who originated PPP loans through the Paycheck Protection Program Liquidity Facility, or PPPLF. As of June 30, 2020, the Company has not pledged any PPP loans to borrow funds under this facility.

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 the one-month LIBOR.

Subordinated Debentures

On June 19, 2020, the Company issued $50.0 million of subordinated debentures at an initial fixed interest rate of 5.25% which is payable semi-annually. Beginning July 1, 2025, the interest rate converts to a variable interest rate equal to the three-month term SOFR, plus 5.13%, which is payable quarterly. The subordinated debentures mature on July 1, 2030. The subordinated debentures, net of issuance costs, were $48.9 million at June 30, 2020.

On July 12, 2017, the Company issued $25.0 million of subordinated debentures at an initial fixed interest rate of 5.875% which is payable semi-annually. Beginning July 15, 2022, the interest rate converts to a variable interest rate equal to the three-month LIBOR plus 3.88%. The subordinated debentures mature on July 15, 2027. The subordinated debentures, net of issuance costs, were $24.8 million at June 30, 2020, compared to $24.7 million at December 31, 2019.

The subordinated debentures qualify for Tier 2 regulatory capital treatment at the Company level for the first five years, under applicable regulatory guidelines.

Contractual Obligations

The following table ~~contains~~presents supplemental information regarding total contractual obligations at ~~March 31, 2018:~~June 30, 2020:


	Within		One to		Three to		After

									Within		One to		Three to		After
(dollars in thousands)	One Year		Three Years		Five Years		Five Years		One Year		Three Years		Five Years		Five Years		Total
Deposits Without a Stated Maturity	$	838,863	$	—	$	—	$	—	$	1,595,808	$	—	$	—	$	—	$	1,595,808
Time Deposits		159,557		257,463		97,153		—		402,562		126,681		117,000		—		646,243
Notes Payable		1,500		4,000		4,000		7,000		12,000		—		—		—		12,000
FHLB Advances		14,000		25,000		34,000		—		25,000		31,500		86,000		5,000		147,500
Subordinated Debentures		—		—		—		25,000		—		—		—		75,000		75,000
Commitment to Fund Tax Credit Investments										3,405		—		—		—		3,405
Operating Lease Obligations		948		1,654		506		1,066		648		682		649		965		2,944
Totals	$	1,014,868	$	288,117	$	135,659	$	33,066	$	2,039,423	$	158,863	$	203,649	$	80,965	$	2,482,900

43

~~Table~~On August 27, 2018, the Bank and Reuter Walton Commercial, LLC, or the Contractor, entered into a Standard Form of ~~Contents~~

~~Operating lease obligations are in place~~Agreement Between Owner and Contractor and the corresponding General Conditions of the Contract for ~~facilities~~Construction (collectively, the “Construction Contract”). Under the Construction Contract, the Contractor is constructing the core and ~~land on which banking branches are located. Included in operating lease obligations are lease commitments to occupy space~~shell of a new headquarters building for ~~a de novo branch~~the Bank in St. ~~Paul,~~Louis Park, Minnesota, ~~which~~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 the third quarter of 2020. As of June 30, 2020, $22.9 million had been paid under this Construction Contract. On December 3, 2019, the Bank entered into a contract with a third party relating to the construction of the interior build-out of the new headquarters building for the Bank. The sum of the contract is ~~expected~~$6.32 million, with anticipated construction to ~~open during~~be completed in the ~~summer~~third quarter of ~~2018.~~2020. As of June 30, 2020, $5.0 million had been paid under this contract.

The Company believes that it will be able to meet all contractual obligations as they come due through the maintenance of adequate cash levels. The Company expects to maintain adequate cash levels through earnings, loan and

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securities repayments and maturity activity and continued deposit gathering activities. As described above, the Company has in place various borrowing mechanisms for both short-term and long-term liquidity needs.

Shareholders’ Equity

Shareholders’ equity at ~~March 31, 2018~~June 30, 2020 was ~~$199.0~~$257.2 million, an increase of ~~$61.9~~$12.4 million, or ~~45.1%~~5.1%, over shareholders’ equity of ~~$137.2~~$244.8 million at December 31, ~~2017,~~2019, primarily due to ~~$58.9 million of net proceeds from the issuance of common stock in an initial public offering and $6.0~~$15.0 million of net income, partially offset ~~partially~~ by a ~~$2.9~~$1.5 million decrease in accumulated other comprehensive ~~income.~~income and $2.0 million of stock repurchases in the first quarter of 2020. The decrease in accumulated other comprehensive income primarily resulted from interest rate fluctuations between periods.

Stock Repurchase Program. On January 22, 2019, the Company adopted a stock repurchase program. Under the repurchase program, the Company is authorized to repurchase up to $15.0 million of its common stock in open market transactions or through privately negotiated transactions at the Company’s discretion. On July 23, 2019, the Company’s Board of Directors approved a $10.0 million increase to the Company’s stock repurchase program, increasing the authorization to repurchase common stock under the program from a total of $15.0 million to a total of $25.0 million. During the three and six months ended June 30, 2020, the Company repurchased -0- and 177,864 shares of its common stock, respectively, representing less than 1% of the Company’s outstanding shares. Shares were repurchased during the first quarter of 2020 at a weighted average price of $11.52 for a total of $2.0 million. All shares repurchased under the stock repurchase program were converted to authorized but unissued shares. At June 30, 2020, the remaining amount that could be used to repurchase shares under the stock repurchase program was $8.0 million. Although the stock repurchase program remains in place, the Company has not repurchased any shares since March 16, 2020. The Company remains committed to maintaining strong capital levels and will consider the current economic environment and the uncertainty of the long-term impact of the COVID-19 pandemic when evaluating its future utilization of the stock repurchase program. Management currently does not expect to begin repurchasing shares again until the effects of the COVID-19 pandemic have subsided.

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

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

Management believes the Company and the Bank met all capital adequacy requirements to which they were subject as of ~~March 31, 2018.~~June 30, 2020. The regulatory capital ratios for the Company and the Bank to meet the minimum capital adequacy standards and for the Bank to be considered well capitalized under the prompt corrective action framework are set forth in the following tables. The Company’s and the Bank’s actual capital amounts and ratios are as of the dates indicated.

To be Well Capitalized

For Capital Adequacy

Under Prompt Corrective

Actual

Purposes

Action Regulations

March 31, 2018

Amount

Ratio

Amount

Ratio

Amount

Ratio

(dollars in thousands)

Company (Consolidated):

Total Risk-Based Capital

$
239,102

16.22
%
$
117,960

8.00
%

N/A

N/A

Tier 1 Risk-Based Capital

197,069

13.37

88,470

6.00

N/A

N/A

Common Equity Tier 1 Capital

197,069

13.37

66,353

4.50

N/A

N/A

Leverage Ratio

197,069

12.15

64,891

4.00

N/A

N/A

Bank:

Total Risk-Based Capital

$
203,526

13.86
%
$
117,451

8.00
%
$
146,813

10.00
%
Tier 1 Risk-Based Capital

186,045

12.67

88,088

6.00

117,451

8.00

Common Equity Tier 1 Capital

186,045

12.67

66,066

4.50

95,429

6.50

Leverage Ratio

186,045

11.51

64,630

4.00

80,788

5.00

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																	Minimum Required				For Capital Adequacy				To be Well Capitalized
																	For Capital Adequacy				Purposes Plus Capital				Under Prompt Corrective
													Actual				Purposes				Conservation Buffer				Action Regulations
June 30, 2020													Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio

									To be Well Capitalized
					For Capital Adequacy				Under Prompt Corrective
	Actual				Purposes				Action Regulations
December 31, 2017	Amount		Ratio		Amount		Ratio		Amount		Ratio
	(dollars in thousands)
													(dollars in thousands)
Company (Consolidated):
Total Risk-Based Capital	$	173,848	12.46	%	$	111,638	8.00	%		N/A	N/A		$	351,627	15.99	%	$	175,889	8.00	%	$	230,854	10.50	%		N/A	N/A
Tier 1 Risk-Based Capital		132,459	9.49			83,729	6.00			N/A	N/A			250,480	11.39			131,917	6.00			186,882	8.50			N/A	N/A
Common Equity Tier 1 Capital		132,459	9.49			62,797	4.50			N/A	N/A			250,480	11.39			98,937	4.50			153,903	7.00			N/A	N/A
Leverage Ratio		132,459	8.38			63,264	4.00			N/A	N/A
Tier 1 Leverage Ratio														250,480	9.94			100,750	4.00			100,750	4.00			N/A	N/A
Bank:
Total Risk-Based Capital	$	171,805	12.37	%	$	111,134	8.00	%	$	138,918	10.00	%	$	312,358	14.21	%	$	175,816	8.00	%	$	230,759	10.50	%	$	219,770	10.00	%
Tier 1 Risk-Based Capital		154,943	11.15			83,351	6.00			111,134	8.00			284,880	12.96			131,862	6.00			186,805	8.50			175,816	8.00
Common Equity Tier 1 Capital		154,943	11.15			62,513	4.50			90,297	6.50			284,880	12.96			98,897	4.50			153,839	7.00			142,851	6.50
Leverage Ratio		154,943	9.83			63,060	4.00			78,825	5.00
Tier 1 Leverage Ratio														284,880	11.36			100,289	4.00			100,289	4.00			125,361	5.00


					Minimum Required				For Capital Adequacy				To be Well Capitalized
					For Capital Adequacy				Purposes Plus Capital				Under Prompt Corrective
	Actual				Purposes				Conservation Buffer				Action Regulations
December 31, 2019	Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio

	(dollars in thousands)
Company (Consolidated):
Total Risk-Based Capital	$	269,613	12.98	%	$	166,163	8.00	%	$	218,089	10.50	%		N/A	N/A
Tier 1 Risk-Based Capital		236,533	11.39			124,623	6.00			176,549	8.50			N/A	N/A
Common Equity Tier 1 Capital		236,533	11.39			93,467	4.50			145,393	7.00			N/A	N/A
Tier 1 Leverage Ratio		236,533	10.69			88,498	4.00			88,498	4.00			N/A	N/A
Bank:
Total Risk-Based Capital	$	252,501	12.16	%	$	166,137	8.00	%	$	218,055	10.50	%	$	207,671	10.00	%
Tier 1 Risk-Based Capital		243,461	11.72			124,603	6.00			176,521	8.50			166,137	8.00
Common Equity Tier 1 Capital		243,461	11.72			93,452	4.50			145,370	7.00			134,986	6.50
Tier 1 Leverage Ratio		243,461	11.01			88,455	4.00			88,455	4.00			110,569	5.00

The Company and the Bank are subject to the rules of the Basel III regulatory capital framework and related Dodd-Frank Wall Street Reform and Consumer Protection Act. The rules ~~include the implementation of~~require a capital conservation buffer of 2.5% that iswas added to the minimum requirements for capital adequacy purposes. The capital conservation buffer is subject to a three 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 is 1.875%. A banking organization with a conservation buffer of less than the required amount ~~will be~~is subject to limitations on capital distributions, including dividend payments, stock repurchases and certain discretionary bonus payments to executive officers. At ~~March 31, 2018,~~June 30, 2020, the ratios for the Company and the Bank were sufficient to meet the ~~fully phased-in~~ conservation buffer.

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

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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~~presents credit arrangements and financial instruments whose contract amounts represent credit risk as of ~~March 31, 2018~~June 30, 2020 and December 31, ~~2017:~~2019:


									June 30, 2020				December 31, 2019
									Fixed		Variable		Fixed		Variable

	March 31, 2018				December 31, 2017
	Fixed		Variable		Fixed		Variable
	(dollars in thousands)
									(dollars in thousands)
Unfunded Commitments Under Lines of Credit	$	117,314	$	227,110	$	112,555	$	196,958	$	184,430	$	307,943	$	181,622	$	319,340
Letters of Credit		19,787		49,295		12,334		52,212		14,679		67,998		17,503		61,722
Totals	$	137,101	$	276,405	$	124,889	$	249,170	$	199,109	$	375,941	$	199,125	$	381,062

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~~Table of Contents~~

Liquidity

~~Liquidity Management~~

Liquidity is the Company’s capacity to meet cash and collateral obligations at a reasonable cost. ~~The essence of having cash when the Company needs it and having the appropriate amount of cash and other assets that are quickly convertible into cash without incurring significant loss.~~ 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 ~~Company’s~~Bank’s Asset Liability Management, ~~(“ALM”)~~or ALM, Committee, which is comprised of members of senior management, is responsible for managing commitments to meet the needs of customers while achieving the Company’s financial objectives. The ALM Committee meets regularly to review balance sheet composition, funding capacities, and current and forecasted loan demand.

The Company manages liquidity by maintaining adequate levels of cash and other assets from onon- 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. Furthermore, these unencumbered liquid assets are comprised of primarily U.S. government agency mortgage backed securities and other agency securities, which the regulatory bodies consider the most marketable and liquid, especially in a stress scenario. In regards to off-balance sheet capacity, the Company maintains available borrowing capacity under secured borrowing lines with the FHLB and the Federal Reserve Bank of Minneapolis, as well as unsecured lines of credit for the purpose of overnight funds with various correspondent banks, which the Company refers to as secondary liquidity.

In addition, the Bank is a member of the American Financial Exchange, ~~(“AFX”),~~or AFX, through which it may either borrow or lend funds on an overnight or short-term basis with a group of approved commercial banks. The availability of funds changes daily. As of ~~March 31, 2018,~~June 30, 2020, the Company had no borrowings outstanding through the AFX. The Bank has also established additional borrowing capacity through the Federal Reserve Bank’s PPPLF, where it can pledge PPP loans to borrow an equal amount of funds. As of June 30, 2020, the Company had no borrowings outstanding through this facility and $180.2 million of PPP loans available to pledge. The facility is available through September 30, 2020.

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



Primary Liquidity—On-Balance Sheet	March 31, 2018			December 31, 2017			June 30, 2020			December 31, 2019
	(Dollars in thousands)
							(Dollars in thousands)
Cash and Cash Equivalents	$	20,125		$	23,725		$	178,428		$	31,935
Securities Available for Sale		236,819			229,491			326,295			289,877
Less: pledged securities		64,288			81,639
Total primary liquidity	$	192,656		$	171,577
Ratio of primary liquidity to total deposits		14.2	%		12.8	%
Total Primary Liquidity							$	504,723		$	321,812
Ratio of Primary Liquidity to Total Deposits								22.5	%		17.6	%

Secondary Liquidity—Off-Balance Sheet

Borrowing Capacity

March 31, 2018

December 31, 2017

(Dollars in thousands)

Net secured borrowing capacity with the FHLB

$
192,237

$
180,942

Net secured borrowing capacity with the Federal Reserve Bank

34,675

37,530

Unsecured borrowing capacity with correspondent lenders

60,000

60,000

Total secondary liquidity

$
286,912

$
278,472

Ratio of primary and secondary liquidity to total deposits

35.4
%

33.6
%


Secondary Liquidity—Off-Balance Sheet
Borrowing Capacity	June 30, 2020			December 31, 2019

	(Dollars in thousands)
Net Secured Borrowing Capacity with the FHLB	$	230,875		$	209,840
Net Secured Borrowing Capacity with the Federal Reserve Bank		107,636			113,164
Unsecured Borrowing Capacity with Correspondent Lenders		105,000			105,000
Total Secondary Liquidity	$	443,511		$	428,004
Ratio of Primary and Secondary Liquidity to Total Deposits		42.3	%		41.1	%

During the ~~first quarter of 2018,~~six months ended June 30, 2020, primary liquidity increased by ~~$21.1~~$182.9 million due to a ~~$7.3~~$146.5 million increase in cash and cash equivalents and a $36.4 million increase in securities available for sale, ~~and $17.4 decrease in pledged securities, offset partially by a $3.6 million decrease in cash and cash equivalents,~~ when compared to December 31, ~~2017.~~2019. Secondary liquidity increased by ~~$8.4~~$15.5 million as of ~~March 31, 2018~~June 30, 2020 when compared to December 31, ~~2017,~~2019, due ~~mainly~~ to a ~~$11.3~~$21.0 million increase in the borrowing capacity on the secured borrowing line with the FHLB, partially offset ~~partially~~ by a ~~$2.9~~$5.5 million decrease in the borrowing capacity on the secured credit line with the Federal Reserve Bank.

In addition to primary liquidity, the Company generates liquidity from cash flows from the loan and securities portfolios and from the large base of core customer deposits, defined as noninterest bearing transaction, interest bearing

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~~Table of Contents~~

transaction, savings, non-brokered money market accounts and non-brokered time deposits less than $250,000. At ~~March 31, 2018,~~June 30, 2020, core deposits totaled approximately ~~$1.0~~$1.70 billion and represented ~~74.5%~~75.7% of total deposits. These core deposits are normally less volatile, often with customer relationships tied to other products offered by the Company, which promote long-standing relationships and stable funding sources.

The Company uses brokered deposits, the availability of which is uncertain and subject to competitive market forces and regulation, for liquidity management purposes. At ~~March 31, 2018,~~June 30, 2020, brokered deposits totaled ~~$228.8~~$409.1 million, consisting of ~~$209.4~~$264.1 million of brokered time deposits and ~~$19.4~~$145.0 million of non-maturity brokered money market and transaction accounts. At December 31, ~~2017,~~2019, brokered deposits totaled ~~$207.5~~$234.4 million, consisting of ~~$183.4~~$231.9 million of brokered time deposits and ~~$24.1~~$2.4 million of non-maturity brokered money market and transaction accounts. The Company has increased the amount of brokered deposits in recent quarters because of the efficiency in obtaining such deposits, as well as the cost savings relative to comparable core deposit offerings.

The Company’s liquidity policy includes guidelines for On-Balance Sheet Liquidity (a measurement of primary liquidity to total deposits plus borrowings), Total On-Balance Sheet Liquidity with Borrowing Capacity (a measurement of primary and secondary liquidity to total deposits plus borrowings), Wholesale Funding Ratio (a measurement of total wholesale funding to total deposits plus borrowings), and other guidelines developed for measuring and maintaining liquidity. As of ~~March 31, 2018,~~June 30, 2020, the Company was in compliance with all established liquidity ~~guidelines.~~guidelines in the policy.

Non-GAAP Financial Measures

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

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

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

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

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

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

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

following tables.

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	For the Three Months Ended															For the Six Months Ended
	June 30,			March 31,			December 31,			September 30,			June 30,			June 30,			June 30,
	2020			2020			2019			2019			2019			2020			2019
(dollars in thousands)
Efficiency Ratio
Noninterest Expense	$	10,711		$	9,746		$	10,489		$	9,084		$	9,474		$	20,457		$	17,359
Less: Amortization of Intangible Assets		(47)			(48)			(48)			(48)			(47)			(95)			(95)
Adjusted Noninterest Expense	$	10,664		$	9,698		$	10,441		$	9,036		$	9,427		$	20,362		$	17,264
Net Interest Income		21,342			20,102			19,928			18,935			18,138			41,444			35,269
Noninterest Income		1,977			1,719			1,112			946			1,134			3,696			1,768
Less: Gain on Sales of Securities		(1,361)			(3)			—			(58)			(463)			(1,364)			(458)
Adjusted Operating Revenue	$	21,958		$	21,818		$	21,040		$	19,823		$	18,809		$	43,776		$	36,579
Efficiency Ratio		48.6	%		44.4	%		49.6	%		45.6	%		50.1	%		46.5	%		47.2	%

Adjusted Efficiency Ratio
Noninterest Expense	$	10,711		$	9,746		$	10,489		$	9,084		$	9,474		$	20,457		$	17,359
Less: Amortization of Tax Credit Investments		(362)			(85)			(1,128)			(530)			(1,390)			(447)			(1,567)
Less: FHLB Advance Prepayment Fees		(1,430)			—			—			—			—			(1,430)			—
Less: Amortization of Intangible Assets		(47)			(48)			(48)			(48)			(47)			(95)			(95)
Adjusted Noninterest Expense	$	8,872		$	9,613		$	9,313		$	8,506		$	8,037		$	18,485		$	15,697
Net Interest Income		21,342			20,102			19,928			18,935			18,138			41,444			35,269
Noninterest Income		1,977			1,719			1,112			946			1,134			3,696			1,768
Less: Gain on Sales of Securities		(1,361)			(3)			—			(58)			(463)			(1,364)			(458)
Adjusted Operating Revenue	$	21,958		$	21,818		$	21,040		$	19,823		$	18,809		$	43,776		$	36,579
Adjusted Efficiency Ratio		40.4	%		44.1	%		44.3	%		42.9	%		42.7	%		42.2	%		42.9	%


	For the Three Months Ended																For the Six Months Ended
	June 30,			March 31,			December 31,			September 30,			June 30,				June 30,			June 30,
	2020			2020			2019			2019			2019				2020			2019
(dollars in thousands)
Pre-Provision Net Revenue
Noninterest Income	$	1,977		$	1,719		$	1,112		$	946		$	1,134		$	3,696		$	1,768
Less: Gain on sales of Securities		(1,361)			(3)			—			(58)			(463)			(1,364)			(458)
Total Operating Noninterest Income		616			1,716			1,112			888			671			2,332			1,310
Plus: Net Interest income		21,342			20,102			19,928			18,935			18,138			41,444			35,269
Net Operating Revenue	$	21,958		$	21,818		$	21,040		$	19,823		$	18,809		$	43,776		$	36,579

Noninterest Expense	$	10,711		$	9,746		$	10,489		$	9,084		$	9,474		$	20,457		$	17,359
Less: Amortization of Tax Credit Investments		(362)			(85)			(1,128)			(530)			(1,390)			(447)			(1,567)
Less: FHLB Advance Prepayment Fees		(1,430)			—			—			—			—			(1,430)			—
Total Operating Noninterest Expense	$	8,919		$	9,661		$	9,361		$	8,554		$	8,084		$	18,580		$	15,792

Pre-Provision Net Revenue	$	13,039		$	12,157		$	11,679		$	11,269		$	10,725		$	25,196		$	20,787

Plus:
Non-Operating Revenue Adjustments		1,361			3			—			58			463			1,364			458
Less:
Provision for Loan Losses		3,000			2,100			600			900			600			5,100			1,200
Non-Operating Expense Adjustments		1,792			85			1,128			530			1,390			1,877			1,567
Provision for Income Taxes		2,010			2,532			1,380			2,092			1,189			4,542			3,451
Net Income	$	7,598		$	7,443		$	8,571		$	7,805		$	8,009		$	15,041		$	15,027

Average Assets	$	2,622,272		$	2,317,040		$	2,221,370		$	2,168,909		$	2,069,707		$	2,469,656		$	2,040,602
Pre-Provision Net Revenue Return on Average Assets		2.00	%		2.11	%		2.09	%		2.08	%		2.08	%		2.05	%		2.05	%

66

As of and for the Three Months Ended

Mar 31,

Mar 31,


2018

2017

(dollars in thousands, except share data)

Efficiency Ratio

Noninterest Expense

$
6,532

$
5,254

Less: Amortization of Intangible Assets

(48)

(48)

Adjusted Noninterest Expense

$
6,484

$
5,206

Net Interest Income

14,763

12,191

Noninterest Income

387

480

Less: (Gain) Loss on Sales of Securities

—

(31)

Adjusted Operating Revenue

$
15,150

$
12,640

Efficiency Ratio

42.8
%

41.2
%

Tangible Common Equity and Tangible Common Equity/Tangible Assets

Common Equity

$
199,039

$
120,742

Less: Intangible Assets

(3,821)

(4,012)

Tangible Common Equity

195,218

116,730

Total Assets

1,681,597

1,354,354

Less: Intangible Assets

(3,821)

(4,012)

Tangible Assets

$
1,677,776

$
1,350,342

Tangible Common Equity/Tangible Assets

11.64
%

8.64
%

Tangible Book Value Per Share

Book Value Per Common Share

$
6.62

$
4.91

Less: Effects of Intangible Assets

(0.13)

(0.16)

Tangible Book Value Per Common Share

$
6.49

$
4.75

Average Tangible Common Equity

Average Common Equity

$
149,318

$
118,870

Less: Effects of Average Intangible Assets

(3,844)

(4,028)

Average Tangible Common Equity

$
145,474

$
114,842

Table of Contents


	For the Three Months Ended																For the Six Months Ended
	June 30,			March 31,			December 31,			September 30,			June 30,				June 30,		June 30,
	2020			2020			2019			2019			2019				2020		2019
(dollars in thousands)
Tangible Common Equity and Tangible Common Equity/Tangible Assets
Common Equity	$	257,190		$	248,143		$	244,794		$	236,059		$	229,137
Less: Intangible Assets		(3,391)			(3,439)			(3,487)			(3,535)			(3,582)
Tangible Common Equity		253,799			244,704			241,307			232,524			225,555
Total Assets		2,754,463			2,418,730			2,268,830			2,232,339			2,123,631
Less: Intangible Assets		(3,391)			(3,439)			(3,487)			(3,535)			(3,582)
Tangible Assets	$	2,751,072		$	2,415,291		$	2,265,343		$	2,228,804		$	2,120,049
Tangible Common Equity/Tangible Assets		9.23	%		10.13	%		10.65	%		10.43	%		10.64	%

Tangible Book Value Per Share
Book Value Per Common Share	$	8.92		$	8.61		$	8.45		$	8.20		$	7.90
Less: Effects of Intangible Assets		(0.12)			(0.12)			(0.12)			(0.12)			(0.12)
Tangible Book Value Per Common Share	$	8.80		$	8.49		$	8.33		$	8.08		$	7.78

Average Tangible Common Equity
Average Common Equity	$	255,109		$	250,800		$	240,188		$	232,590		$	231,374		$	252,955	$	228,625
Less: Average Intangible Assets		(3,419)			(3,466)			(3,510)			(3,558)			(3,605)			(3,442)		(3,630)
Average Tangible Common Equity	$	251,690		$	247,334		$	236,678		$	229,032		$	227,769		$	249,513	$	224,995

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk

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

The Company’s management of interest rate risk is overseen by its ALM Committee, based on a risk management infrastructure approved by the board of directors that outlines reporting and measurement requirements. In particular, this infrastructure sets limits and management targets for various metrics, including net interest income simulation involving parallel shifts in interest rate curves, steepening and flattening yield curves, and various prepayment and deposit duration assumptions. The Company’s risk management infrastructure also requires a periodic review of all key assumptions used, such as identifying appropriate interest rate scenarios, setting loan prepayment rates based on historical analysis and noninterest bearing and interest bearing transaction deposit durations based on historical analysis.

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~~Table of Contents~~

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 ~~instance,~~example, the Company occasionally uses special offers on deposits to alter the interest rates and terms associated with interest bearing liabilities.

The Company ~~manages the~~has entered into certain hedging transactions including interest rate ~~risk associated with~~swaps, which are designed to lessen elements of the Company’s interest ~~earning assets by managing~~rate exposure. The Company utilizes cash flow hedges to manage interest rate exposure for the brokered certificate of deposit, wholesale borrowing, and notes payable portfolios. The hedging strategy converts variable interest rates to a fixed interest rate and ~~terms associated with investment securities portfolio by purchasing~~is used in an effort to protect the Company from floating interest rate variability. At June 30, 2020 and ~~selling investment securities from time to time.~~December 31, 2019, these cash flow hedges had a total notional amount of

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Table of Contents

$107.0 million and $48.0 million, respectively. In the event that interest rates do not change in the manner anticipated, such transactions may adversely affect the Company’s results of operations.

Net Interest Income Simulation

The Company uses a net interest income simulation model to measure and evaluate potential changes in net interest income that would result over the next 12 months from immediate and sustained changes in interest rates as of the measurement date. This model has inherent limitations and the results are based on a given set of rate changes and assumptions as of a certain point in time. For ~~purpose~~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~~the Company’s net interest income in hypothetical rising and declining rate scenarios calculated as of ~~March 31, 2018~~June 30, 2020 are presented in the table below. The projections assume an immediate, parallel ~~shifts~~shift 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.



					June 30, 2020				December 31, 2019
Change (basis points) in Interest Rates	Forecasted Net		Percentage Change		Forecasted Net		Percentage Change		Forecasted Net		Percentage Change
(12-Month Projection)	Interest Income		from Base		Interest Income		from Base		Interest Income		from Base
+400	$	67,321	12.62	%	$	82,229	16.44	%	$	80,558		13.47	%
+300		65,473	9.53			78,772	11.54			78,064		9.95
+200		63,622	6.43			75,220	6.51			75,591		6.47
+100		61,738	3.28			72,345	2.44			73,113		2.98
0		59,777	—			70,622	—			70,996		—
−100		57,317	(4.11)			69,819	(1.14)			68,685		(3.26)

The table above indicates that as of ~~March 31, 2018,~~June 30, 2020, in the event of an immediate and sustained ~~300~~400 basis point increase in interest rates, wethe Company would experience ~~an 9.53%~~a 16.44% increase in net interest income. In the event of an immediate 100 basis point decrease in interest rates, wethe Company would experience a ~~4.11%~~1.14% 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~~the Company’s assets. Actual results could differ from those projected if ~~we grow~~the Company grows assets and liabilities faster or slower than estimated, if ~~we experience~~the Company experienced a net outflow of deposit liabilities, or if ~~our~~the mix of assets and liabilities otherwise changes. Actual results could also differ from those projected if

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~~Table of Contents~~

~~we experience~~ the Company experienced substantially different repayment speeds in ~~our~~the loan portfolio than those assumed in the simulation model. Finally, these simulation results do not contemplate all the actions that wethe Company may undertake in response to potential or actual changes in interest rates, such as changes to ~~our~~the Company’s loan, investment, deposit, or funding strategies.

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Table of Contents

LIBOR Transition

LIBOR is used as an index rate for the Company’s interest-rate swaps, subordinated debt, various investment securities and approximately 8.5% of the Company’s loans as of June 30, 2020. It is expected that the number of institutions that have been reporting information used to set LIBOR will stop doing so after 2021 when their reporting commitment ends. As a result, LIBOR may no longer be available as an index or may be seen as no longer representative of the market. Alternative reference rates are being identified, but existing contracts may not have been written to allow the use of these alternatives. The Company is evaluating the risks related to this transition and its evaluation and mitigation of risks related to the discontinuation of LIBOR may span several reporting periods through 2021.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the design and operation of the Company’s “disclosure controls and procedures” (as that term is defined in Rule ~~13a‑15(e)~~13a-15(e) under the Securities Exchange Act of 1934, or the Exchange Act) as of ~~March 31, 2018,~~June 30, 2020, the end of the fiscal quarter covered by this Quarterly Report on Form ~~10‑Q.~~10-Q. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of ~~March 31, 2018,~~June 30, 2020, the Company’s disclosure controls and procedures were effective to ensure that the information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

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

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~~Table of Contents~~

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1.A. Risk Factors

~~There have been no material changes~~In addition to the risk factors ~~disclosed~~set forth under Part I, Item 1A “Risk Factors” in the Company’s ~~prospectus filed~~Form 10-K for the fiscal year ended December 31, 2019, the following risk factors apply to the Company:

The outbreak of COVID-19 has led to an economic recession and other severe disruptions in the U.S. economy and has adversely impacted certain industries in which our clients operate and impaired their ability to fulfill their financial obligations to us. As a result, we are starting to see the impact from COVID-19 on our business, and we believe that it will be significant, adverse and potentially material.

Currently, COVID-19 is spreading through the United States and the world. The spread of COVID-19 has caused severe disruptions in the U.S. economy at large, and for small businesses in particular, which has disrupted our operations. We are starting to see the impact from COVID-19 on our business, and we believe that it will be significant,

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adverse and potentially material. The responses on the part of the U.S. and global governments and populations have created a recessionary environment, reduced economic activity and caused significant volatility in the global stock markets. We expect that we will experience significant disruptions across our business due to these effects, leading to decreased earnings and significant loan defaults and slowdowns in our loan collections. We expect increased unemployment and recessionary concerns will adversely affect loan originations in future periods.

The outbreak of COVID-19 has resulted in a decline in our clients’ businesses, a decrease in consumer confidence, an increase in unemployment and a disruption in the services provided by our vendors. Continued disruptions to our clients’ businesses could result in increased risk of delinquencies, defaults, foreclosures and losses on our loans, negatively impact regional economic conditions, result in declines in local loan demand, liquidity of loan guarantors, the value of loan collateral (particularly in real estate), loan originations and deposit availability and negatively impact the implementation of our growth strategy. Although the U.S. government has introduced a number of programs designed to soften the impact of COVID-19 on small businesses, once these programs expire, our borrowers may not be able to satisfy their financial obligations to us.

In addition, COVID-19 has impacted and likely will continue to impact the financial ability of businesses and consumers to borrow money, which would negatively impact loan volumes. Certain of our borrowers are in or have exposure to the retail and hospitality industries and are located in areas that are or were quarantined or under stay-at-home orders, and COVID-19 may also have an adverse effect on our commercial real estate portfolio, particularly with respect to real estate with exposure to these industries, and consumer loan portfolio. Any new or prolonged quarantine or stay-at-home orders would have a negative adverse impact on these borrowers and their revenue streams, which consequently impacts their ability to meet their financial obligations to us and could result in loan defaults.

As a result of the COVID-19 pandemic we may experience adverse financial consequences due to a number of other factors, including, but not limited to:

●

a further and sustained decline in our stock price or the occurrence of what management would deem to be a triggering event that could, under certain circumstances, cause management to perform impairment testing on our goodwill and other intangible assets that could result in an impairment charge being recorded for that period, and adversely impact our results of operations and the ability of the Bank to pay dividends to us;

●

the negative effect on earnings resulting from the Bank modifying loans and agreeing to loan payment deferrals due to the COVID-19 crisis;

●

increased demand on our liquidity as we meet borrowers’ needs and cover expenses related to our business continuity plan;

●

the potential for reduced liquidity and its negative effect on our capital and leverage ratios;

●

increased cyber and payment fraud risk due to increased online and remote activity; and

●

other operational failures due to changes in our normal business practices because of the pandemic and governmental actions to contain it.

Overall, we believe that the economic impact from COVID-19 will be severe and could have a material and adverse impact on our business and result in significant losses in our loan portfolio, all of which would adversely and materially impact our earnings and capital. Even after the COVID-19 pandemic has subsided, we may continue to experience materially adverse impacts to our business as a result of the global economic impact of the COVID-19 pandemic, including the availability of credit, adverse impacts on liquidity and any recession that has occurred or may occur in the future. There are no comparable recent events that provide guidance as to the effect the spread of COVID-19 as a global pandemic may have, and, as a result, the ultimate impact of the pandemic is highly uncertain and subject to change.

The U.S. government and banking regulators, including the Federal Reserve, have taken a number of unprecedented actions in response to the COVID-19 pandemic, which could ultimately have a material adverse effect on our business and results of operations.

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On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief and Economic Security Act, or CARES Act, which established a $2.0 trillion economic stimulus package, including cash payments to individuals, supplemental unemployment insurance benefits and a $349 billion loan program administered through the SBA, referred to as the PPP. In addition to implementing the programs contemplated by the CARES Act, the federal bank regulatory agencies have issued a steady stream of guidance in response to the COVID-19 pandemic and have taken a number of unprecedented steps to help banks navigate the pandemic and mitigate its impact. These include, without limitation:

●

requiring banks to focus on business continuity and pandemic planning;

●

adding pandemic scenarios to stress testing;

●

encouraging bank use of capital buffers and reserves in lending programs;

●

permitting certain regulatory reporting extensions;

●

reducing margin requirements on swaps;

●

permitting certain otherwise prohibited investments in investment funds;

●

issuing guidance to encourage banks to work with customers affected by the pandemic and encourage loan workouts; and

●

providing credit under the CRA for certain pandemic-related loans, investments and public service.

The COVID-19 pandemic has significantly affected the financial markets, and the Federal Reserve has taken a number of actions in response. In March 2020, the Federal Reserve dramatically reduced the target federal funds rate and announced a $700 billion quantitative easing program in response to the expected economic downturn caused by the COVID-19 pandemic. In addition, the Federal Reserve reduced the interest that it pays on excess reserves. We expect that these reductions in interest rates, especially if prolonged, could adversely affect our net interest income and margins and our profitability. The Federal Reserve also launched the Main Street Lending Program, which will offer deferred interest on four-year loans to small and mid-sized businesses. The full impact of the COVID-19 pandemic on our business activities as a result of new government and regulatory laws, policies, programs and guidelines, as well as market reactions to such activities, remains uncertain but may ultimately have a material adverse effect on our business and results of operations.

COVID-19 has disrupted banking and other financial activities in the areas in which we operate and could potentially create widespread business continuity issues for us.

The COVID-19 pandemic has negatively impacted the ability of our employees and clients to engage in banking and other financial transactions in the geographic area in which we operate and could create widespread business continuity issues for us. We also could be adversely affected if key personnel or a significant number of employees were to become unavailable due to the effects and restrictions of an outbreak or escalation of the COVID-19 pandemic in our market area, including because of illness, quarantines, government actions or other restrictions in connection with the ~~SEC~~COVID-19 pandemic. Although we have business continuity plans and other safeguards in place, there is no assurance that such plans and safeguards will be effective. Further, we rely upon our third-party vendors to conduct business and to process, record, and monitor transactions. If any of these vendors are unable to continue to provide us with these services, it could negatively impact our ability to serve our clients.

As a participating lender in the PPP, we are subject to additional risks of litigation from our clients or other parties regarding our processing of loans for the PPP and risks that the SBA may not fund some of or all PPP loan guarantees.

The CARES Act included a $349 billion loan program administered through the SBA referred to as the PPP. Under the PPP, small businesses and other entities and individuals can apply for loans from existing SBA lenders and other approved regulated lenders that enroll in the program, subject to numerous limitations and eligibility criteria. The Bank is participating as a lender in the PPP. The PPP opened on ~~March 14, 2018, pursuant~~April 3, 2020; however, because of the short timeframe between the passing of the CARES Act and the opening of the PPP, there is some ambiguity in the laws, rules, and guidance regarding the operation of the PPP, which exposes us to ~~Rule 424(b)(4)~~risks relating to noncompliance with the PPP. On or about April 16, 2020, the SBA notified lenders that the $349 billion earmarked for the PPP was exhausted. On April 24,

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2020, an additional $310 billion in funding for PPP loans was authorized, and such funds became available for PPP loans beginning on April 27, 2020.

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

We also have credit risk on PPP loans if a determination is made by the SBA that there is a deficiency in the manner in which the loan was originated, funded, or serviced by the Bank, such as an issue with the eligibility of a borrower to receive a PPP loan, which may or may not be related to the ambiguity in the laws, rules, and guidance regarding the operation of the PPP. In the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there is a deficiency in the manner in which the PPP loan was originated, funded, or serviced by us, the SBA may deny its liability under the ~~Securities Act~~guaranty, reduce the amount of ~~1933.~~the guaranty, or, if it has already paid under the guaranty, seek recovery of any loss related to the deficiency from us.

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

Unregistered Sales of Equity Securities

None.

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. The aggregate offering price for the shares sold by the Company was $63.2 million, and after deducting $4.3 million of underwriting discounts and offering expenses paid to third parties, the Company received total net proceeds of $58.9 million. In addition, certain selling shareholders participated in the offering and sold an aggregate of 2,325,487 shares of common stock at an aggregate offering price of $27.3 million. 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, and registered shares of the Company’s common stock with a maximum aggregate offering price of $96.3 million. Sandler O’Neill + Partners, L.P. and D.A. Davidson & Co. acted as joint book-running managers for the offering. The Company’s common stock is currently traded on the Nasdaq Capital Market under the symbol “BWB”.None.

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 March 31, 2018, the Company contributed $25.0 million of the net proceeds of the initial public offering to the Bank.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

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Item 6. Exhibits


Exhibit Number		Description
~~Exhibit Number~~4.1		~~Description~~Indenture, dated June 19, 2020, by and between Bridgewater Bancshares, Inc. and U.S. Bank National Association, as trustee (incorporated herein by reference to Exhibit 4.1 filed with the Form 8-K on June 19, 2020)
4.2		Forms of 5.25% Fixed-to-Floating Rate Subordinated Note due July 1, 2030 (included as Exhibit A-1 and Exhibit A-2 to the Indenture filed as Exhibit 4.1 hereto and incorporated herein by reference to Exhibit 4.1 filed with the Form 8-K on June 19, 2020).
~~31.1~~10.1		Form of Subordinated Note Purchase Agreement, dated June 19, 2020, by and among Bridgewater Bancshares, Inc. and the Purchasers (incorporated herein by reference to Exhibit 10.1 filed with the Form 8-K on June 19, 2020)
10.2		Form of Registration Rights Agreement, dated June 19, 2020, by and among Bridgewater Bancshares, Inc. and the Purchasers (incorporated herein by reference to Exhibit 10.2 filed with the Form 8-K on June 19, 2020)
31.1		Certification of the Chief Executive Officer required by Rule 13a-14(a) of the Securities Exchange Act of 1934, and Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certification of the Chief Financial Officer required by Rule 13a-14(a) of the Securities Exchange Act of 1934, and Section 302 of the Sarbanes-Oxley Act of 2002
32.1		Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2		Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.1		Financial information from the Company’s Quarterly Report on Form 10-Q for the quarterly period ended ~~March 31, 2018,~~June 30, 2020, formatted in inline XBRL interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Income; (iii) Consolidated Statements of Comprehensive Income; (iv) Consolidated Statements of Shareholders’ Equity; (v) Consolidated Statements of Cash Flows; and (vi) Notes to Consolidated Financial Statements

104

The cover page for Bridgewater Bancshares, Inc’s Form 10-Q Report for the quarterly period ended June 30, 2020 formatted in inline XBRL and contained in Exhibit 101.

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SIGNATURES

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


	Bridgewater Bancshares, Inc.
	~~Bridgewater Bancshares, Inc~~.

Date: ~~May 10, 2018~~August 6, 2020	By:	/s/ Jerry J. Baack
	Name:	Jerry J. Baack
	Title:	Chairman, Chief Executive Officer and President (Principal Executive Officer)

Date: ~~May 10, 2018~~August 6, 2020	By:	/s/ Joe M. Chybowski
	Name:	Joe M. Chybowski
	Title:	~~Senior Vice President and~~ Chief Financial Officer (Principal Financial and Accounting Officer)

5374


Minnesota (State or other jurisdiction of incorporation or organization)		~~26‑0113412~~26-0113412 (I.R.S. Employer Identification No.)

3800 American Boulevard West, Suite 100 Bloomington, Minnesota (Address of principal executive offices)		55431 (Zip Code)


Large accelerated filer	☐	Accelerated filer	☐☒

~~Non‑accelerated~~Non-accelerated filer	☒ ~~(Do not check if a smaller reporting company)~~☐	Smaller reporting company	☐☒
	Emerging growth company ☒


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


PART I FINANCIAL INFORMATION	3

~~PART I FINANCIAL INFORMATION~~	3

Item 1. Consolidated Financial Statements (unaudited)	3
Consolidated Balance Sheets	3
Consolidated Statements of Income	4
Consolidated Statements of Comprehensive Income	5
Consolidated Statements of Shareholders’ Equity	6
Consolidated Statements of Cash Flows	7
Notes to Consolidated Financial Statements	8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	2734
Item 3. Quantitative and Qualitative Disclosures About Market Risk	4867
Item 4. Controls and Procedures	5069

PART II OTHER INFORMATION	5169

Item 1. Legal Proceedings	5169
Item 1A. Risk Factors	5169
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	5172
Item 3. Defaults Upon Senior Securities	5172
Item 4. Mine Safety Disclosures	5172
Item 5. Other Information	5172
Item 6. Exhibits	73

52SIGNATURES	74


											Accumulated
							Additional				Other
	Shares		Common Stock				Paid-‑In		Retained		Comprehensive
	Voting	Nonvoting	Voting		Nonvoting		Capital		Earnings		Income (Loss)		Total
��	(dollars in thousands, except share data)
BALANCE December 31, 2016	20,744,001	3,845,860	$	207	$	38	$	65,777	$	52,619	$	(3,275)	$	115,366
Stock-based Compensation	—	—		—		—		53		—		—		53
Comprehensive Income	—	—		—		—		—		4,083		1,240		5,323
BALANCE March 31, 2017	20,744,001	3,845,860	$	207	$	38	$	65,830	$	56,702	$	(2,035)	$	120,742

BALANCE December 31, 2017	20,834,001	3,845,860	$	208	$	38	$	66,324	$	69,508	$	1,084	$	137,162
Stock-based Compensation	—	—		—		—		199		—		—		199
Comprehensive Income (Loss)	—	—		—		—		—		5,950		(3,129)		2,821
Issuance of Common Stock, Net of Issuance Costs	5,379,513			54				58,803		—		—		58,857
Conversion of Non-voting Stock to Voting Stock	1,022,318	(1,022,318)		10		(10)		—		—		—		—
Reclassification of the Income Tax Effects of the Tax Cuts and Jobs Act to Retained Earnings	—	—		—		—		—		(194)		194		—
BALANCE March 31, 2018	27,235,832	2,823,542	$	272	$	28	$	125,326	$	75,264	$	(1,851)	$	199,039


			Construction						CRE		CRE
			and Land		1‑4 Family				Owner		Non‑owner		Consumer
Allowance for Loan Losses at March 31, 2018	Commercial		Development		Mortgage		Multifamily		Occupied		Occupied		and Other		Unallocated		Total
Individually Evaluated for Impairment	$	14	$	—	$	49	$	8	$	23	$	—	$	—	$	—	$	94
Collectively Evaluated for Impairment		2,211		1,765		2,369		3,468		891		5,407		50		866		17,027
Totals	$	2,225	$	1,765	$	2,418	$	3,476	$	914	$	5,407	$	50	$	866	$	17,121

Allowance for Loan Losses at December 31, 2017
Individually Evaluated for Impairment	$	14	$	—	$	57	$	14	$	24	$	—	$	—	$	—	$	109
Collectively Evaluated for Impairment		2,421		1,892		2,260		3,156		932		5,087		60		585		16,393
Totals	$	2,435	$	1,892	$	2,317	$	3,170	$	956	$	5,087	$	60	$	585	$	16,502


	March 31, 2018
	Pass		Watch		Substandard		Total

									June 30, 2020
									Pass		Watch		Substandard		Total
Commercial	$	197,401	$	1,840	$	21	$	199,262	$	280,767	$	21,515	$	254	$	302,536
Paycheck Protection Program										180,228		—		—		180,228
Construction and Land Development		145,538		1,729		575		147,842		191,472		132		164		191,768
Real Estate Mortgage:
HELOC and 1-4 Family Junior Mortgage		24,915		500		335		25,750		30,142		137		—		30,279
1st REM - 1-4 Family		34,287		—		133		34,420		39,235		123		174		39,532
LOCs and 2nd REM - Rentals		13,564		—		223		13,787		19,759		474		305		20,538
1st REM - Rentals		125,376		—		1,240		126,616		197,594		763		750		199,107
Multifamily		332,705		—		65		332,770		522,491		—		—		522,491
CRE Owner Occupied		59,814		5,124		2,574		67,512		70,881		818		1,840		73,539
CRE Non-owner Occupied		450,218		3,280		—		453,498		605,742		21,689		220		627,651
Consumer and Other		3,893		—		70		3,963		6,076		—		33		6,109
Totals	$	1,387,711	$	12,473	$	5,236	$	1,405,420	$	2,144,387	$	45,651	$	3,740	$	2,193,778


	Accruing Interest
			30-89 Days		90 Days or
March 31, 2018	Current		Past Due		More Past Due		Nonaccrual		Total

											Accruing Interest
													30-89 Days		90 Days or
June 30, 2020											Current		Past Due		More Past Due		Nonaccrual		Total
Commercial	$	199,233	$	14	$	—	$	15	$	199,262	$	302,508	$	21	$	—	$	7	$	302,536
Paycheck Protection Program												180,228		—		—		—		180,228
Construction and Land Development		147,267		—		—		575		147,842		191,604		—		—		164		191,768
Real Estate Mortgage:
HELOC and 1-4 Family Junior Mortgage		25,415		—		—		335		25,750		30,279		—		—		—		30,279
1st REM - 1-4 Family		34,287		—		—		133		34,420		39,532		—		—		—		39,532
LOCs and 2nd REM - Rentals		13,787		—		—		—		13,787		20,233		—		—		305		20,538
1st REM - Rentals		126,616		—		—		—		126,616		198,981		—		—		126		199,107
Multifamily		332,770		—		—		—		332,770		522,491		—		—		—		522,491
CRE Owner Occupied		67,512		—		—		—		67,512		73,407		132		—		—		73,539
CRE Non-owner Occupied		453,498		—		—		—		453,498		627,651		—		—		—		627,651
Consumer and Other		3,888		5		—		70		3,963		6,109		—		—		—		6,109
Totals	$	1,404,273	$	19	$	—	$	1,128	$	1,405,420	$	2,193,023	$	153	$	—	$	602	$	2,193,778


	March 31, 2018
		Weighted
		Average
	Shares	Exercise Price
Outstanding at Beginning of Year	1,721,000	$	5.68
Granted	5,000		7.78
Exercised	—		—
Forfeitures	—		—
Outstanding at Period End	1,726,000	$	5.68

Options Exercisable at Period End	533,000	$	2.88

Weighted-Average Value of Options Granted During the Period	5,000	$	2.91


		Weighted
	Number of	Average Grant
	Shares	Date Fair Value
Nonvested Options at December 31, 2017	1,302,000	$	2.55
Granted	5,000		2.91
Vested	(114,000)		1.57
Forfeited	—		—
Nonvested Options at March 31, 2018	1,193,000	$	2.65


	As of and for the Three Months Ended
	Mar 31,			Mar 31,
	2018			2017
Per Common Share Data (1)
Basic Earnings Per Share	$	0.23		$	0.17
Diluted Earnings Per Share		0.23			0.16
Book Value Per Share		6.62			4.91
Tangible Book Value Per Share (2)		6.49			4.75
Basic Weighted Average Shares Outstanding		25,755,764			24,589,861
Diluted Weighted Average Shares Outstanding		26,171,433			24,798,753
Shares Outstanding at Period End		30,059,374			24,589,861

Selected Performance Ratios
Return on Average Assets (Annualized)		1.48	%		1.26	%
Return on Average Common Equity (Annualized)		16.16			13.93
Return on Average Tangible Common Equity (Annualized) (2)		16.59			14.42
Yield on Interest Earning Assets		4.76			4.72
Yield on Total Loans, Gross		5.11			5.09
Cost of Interest Bearing Liabilities		1.37			1.08
Cost of Total Deposits		0.92			0.75
Net Interest Spread		3.39			3.64
Net Interest Margin (3)		3.77			3.97
Efficiency Ratio (2)		42.8			41.2
Noninterest Expense to Average Assets		1.61			1.60
Loan to Deposit Ratio		103.9			95.0
Core Deposits to Total Deposits		74.5			76.4
Tangible Common Equity to Tangible Assets (2)		11.64			8.64


	For the three-month period ended
	March 31, 2018						March 31, 2017
	Average		Interest		Yield/		Average		Interest		Yield/
	Balance		& Fees		Rate		Balance		& Fees		Rate
(dollars in thousands)
Interest Earning Assets:
Cash Investments	$	21,693	$	49	0.92	%	$	19,014	$	33	0.70	%
Investment Securities:
Taxable Investment Securities		119,218		633	2.15			96,587		374	1.57
Tax-Exempt Investment Securities (1)		114,828		1,183	4.18			130,230		1,516	4.72
Total Investment Securities		234,046		1,816	3.15			226,817		1,890	3.38
Loans (2)		1,353,031		17,048	5.11			1,051,058		13,192	5.09
Federal Home Loan Bank Stock		5,393		45	3.38			4,170		28	2.72
Total Interest Earning Assets		1,614,163		18,958	4.76			1,301,059		15,143	4.72	%
Noninterest Earning Assets		11,586						10,999
Total Assets	$	1,625,749					$	1,312,058
Interest Bearing Liabilities:
Interest Bearing Transaction Deposits		168,509		113	0.27	%		127,346		77	0.25	%
Savings and Money Market Deposits		354,009		756	0.87			251,027		418	0.68
Time Deposits		298,333		1,223	1.66			278,864		1,017	1.48
Brokered Deposits		211,058		917	1.76			153,412		506	1.34
Federal Funds Purchased		28,511		118	1.68			22,956		49	0.87
Notes Payable		16,500		152	3.74			18,500		167	3.66
FHLB Advances		68,278		299	1.78			53,000		187	1.43
Subordinated Debentures		24,544		369	6.10			—		—	—
Total Interest Bearing Liabilities		1,169,742		3,947	1.37	%		905,105		2,421	1.08	%
Noninterest Bearing Liabilities:
Noninterest Bearing Transaction Deposits		295,587						286,833
Other Noninterest Bearing Liabilities		11,102						1,250
Total Noninterest Bearing Liabilities		306,689						288,083
Shareholders' Equity		149,318						118,870
Total Liabilities and Shareholders' Equity	$	1,625,749					$	1,312,058
Net Interest Income/ Interest Rate Spread				15,011	3.39	%				12,722	3.64	%
Net Interest Margin (3)					3.77	%					3.97	%
Taxable Equivalent Adjustment:
Tax-Exempt Investment Securities				(248)						(531)
Net Interest Income			$	14,763					$	12,191


	Three Months Ended
	March 31,				Increase/
(dollars in thousands)	2018		2017		(Decrease)
Noninterest Income:
Customer Service Fees	$	170	$	152	$	18
Net Gain on Sales of Securities		—		31		(31)
Net Gain on Sales of Foreclosed Assets		4		39		(35)
Letter of Credit Fees		70		126		(56)
Debit Card Interchange Fees		92		93		(1)
Other Income		51		39		12
Totals	$	387	$	480	$	(93)


Secondary Liquidity—Off-Balance Sheet
Borrowing Capacity	March 31, 2018			December 31, 2017
	(Dollars in thousands)
Net secured borrowing capacity with the FHLB	$	192,237		$	180,942
Net secured borrowing capacity with the Federal Reserve Bank		34,675			37,530
Unsecured borrowing capacity with correspondent lenders		60,000			60,000
Total secondary liquidity	$	286,912		$	278,472
Ratio of primary and secondary liquidity to total deposits		35.4	%		33.6	%