UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended ~~September 30, 2022~~March 31, 2023

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

For the transition period from ____________ to ________

Commission File Number 001-38412

BRIDGEWATER BANCSHARES, INC.

(Exact name of registrant as specified in its charter)


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

4450 Excelsior Boulevard, Suite 100 St. Louis Park, Minnesota (Address of principal executive offices)		55416 (Zip Code)

(952) 893-6868

(Registrant’s telephone number, including area code)

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


Title of each class:	Trading Symbol	Name of each exchange on which registered:
Common Stock, $0.01 Par Value	BWB	The Nasdaq Stock Market LLC
Depositary Shares, each representing a 1/100^th interest in a share of 5.875% Non-Cumulative Perpetual Preferred Stock, Series A, par value $0.01 per share	BWBBP	The Nasdaq Stock Market LLC

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

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

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


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

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

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

The number of shares of the Common Stock outstanding as of ~~November 1, 2022~~May 2, 2023 was ~~27,590,978~~27,934,731.

Table of Contents

Table of Contents


PART I FINANCIAL INFORMATION	3

Item 1. Consolidated Financial Statements (unaudited)	3
Consolidated Balance Sheets	3
Consolidated Statements of Income	4
Consolidated Statements of Comprehensive Income	5
Consolidated Statements of Shareholders’ Equity	6
Consolidated Statements of Cash Flows	7
Notes to Consolidated Financial Statements	8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	3237
Item 3. Quantitative and Qualitative Disclosures About Market Risk	6264
Item 4. Controls and Procedures	6465

PART II OTHER INFORMATION	6566

Item 1. Legal Proceedings	6566
Item 1A. Risk Factors	6566
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	66
Item 3. Defaults Upon Senior Securities	6667
Item 4. Mine Safety Disclosures	6667
Item 5. Other Information	67
Item 6. Exhibits	67

SIGNATURES	68

Table of Contents

PART 1 – FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

Bridgewater Bancshares, Inc. and Subsidiaries

Consolidated Balance Sheets

(dollars in thousands, except share data)

September 30,

December 31,


2022

2021

(Unaudited)

ASSETS

Cash and Cash Equivalents

$
75,496

$
143,473
Bank-Owned Certificates of Deposit

1,182

1,876
Securities Available for Sale, at Fair Value

542,007

439,362
Loans, Net of Allowance for Loan Losses of $46,491 at September 30, 2022 (unaudited) and $40,020 at December 31, 2021

3,324,503

2,769,917
Federal Home Loan Bank (FHLB) Stock, at Cost

15,603

5,242
Premises and Equipment, Net

48,941

49,395
Accrued Interest

11,198

9,186
Goodwill

2,626

2,626
Other Intangible Assets, Net

336

479
Other Assets

107,095

56,103
Total Assets

$
4,128,987

$
3,477,659

LIABILITIES AND EQUITY




LIABILITIES




Deposits:




Noninterest Bearing

$
961,084

$
875,084
Interest Bearing

2,343,990

2,071,153
Total Deposits

3,305,074

2,946,237
Federal Funds Purchased

212,000

—
FHLB Advances

71,500

42,500
Subordinated Debentures, Net of Issuance Costs

92,559

92,239
Accrued Interest Payable

2,214

1,409
Other Liabilities

63,633

16,002
Total Liabilities

3,746,980

3,098,387

SHAREHOLDERS' EQUITY




Preferred Stock- $0.01 par value; Authorized 10,000,000

Preferred Stock - Issued and Outstanding 27,600 Series A shares ($2,500 liquidation preference) at September 30, 2022 (unaudited) and December 31, 2021

66,514

66,514
Common Stock- $0.01 par value; Authorized 75,000,000

Common Stock - Issued and Outstanding 27,587,978 at September 30, 2022 (unaudited) and 28,206,566 at December 31, 2021

276

282
Additional Paid-In Capital

95,973

104,123
Retained Earnings

235,964

199,347
Accumulated Other Comprehensive Income (Loss)

(16,720)

9,006
Total Shareholders' Equity

382,007

379,272
Total Liabilities and Equity

$
4,128,987

$
3,477,659


	March 31,		December 31,
	2023		2022
	(Unaudited)
ASSETS
Cash and Cash Equivalents	$	209,192	$	87,043
Bank-Owned Certificates of Deposit		1,225		1,181
Securities Available for Sale, at Fair Value		559,430		548,613
Loans, Net of Allowance for Credit Losses of $50,148 at March 31, 2023 (unaudited) and $47,996 at December 31, 2022		3,625,477		3,512,157
Federal Home Loan Bank (FHLB) Stock, at Cost		28,632		19,606
Premises and Equipment, Net		47,801		48,445
Foreclosed Assets		116		—
Accrued Interest		13,377		13,479
Goodwill		2,626		2,626
Other Intangible Assets, Net		240		288
Bank-Owned Life Insurance		33,719		33,485
Other Assets		81,064		78,739
Total Assets	$	4,602,899	$	4,345,662

LIABILITIES AND EQUITY
LIABILITIES
Deposits:
Noninterest Bearing	$	742,198	$	884,272
Interest Bearing		2,668,925		2,532,271
Total Deposits		3,411,123		3,416,543
Federal Funds Purchased		437,000		287,000
Notes Payable		13,750		13,750
FHLB Advances		197,000		97,000
Subordinated Debentures, Net of Issuance Costs		79,001		78,905
Accrued Interest Payable		3,257		2,831
Other Liabilities		59,762		55,569
Total Liabilities		4,200,893		3,951,598

SHAREHOLDERS' EQUITY
Preferred Stock- $0.01 par value; Authorized 10,000,000
Preferred Stock - Issued and Outstanding 27,600 Series A shares ($2,500 liquidation preference) at March 31, 2023 (unaudited) and December 31, 2022		66,514		66,514
Common Stock- $0.01 par value; Authorized 75,000,000
Common Stock - Issued and Outstanding 27,845,244 at March 31, 2023 (unaudited) and 27,751,950 at December 31, 2022		278		278
Additional Paid-In Capital		97,716		96,529
Retained Earnings		255,394		248,685
Accumulated Other Comprehensive Loss		(17,896)		(17,942)
Total Shareholders' Equity		402,006		394,064
Total Liabilities and Equity	$	4,602,899	$	4,345,662

See accompanying notes to consolidated financial statements.

Table of Contents

Bridgewater Bancshares, Inc. and Subsidiaries

Consolidated Statements of Income

(dollars in thousands, except per share data)

(Unaudited)


	Three Months Ended						Nine Months Ended				Three Months Ended
	September 30,		June 30,		September 30,		September 30,		September 30,		March 31,		March 31,
	2022		2022		2021		2022		2021		2023		2022
INTEREST INCOME
Loans, Including Fees	$	37,666	$	34,358	$	31,049	$	103,768	$	87,705	$	44,955	$	31,744
Investment Securities		4,372		3,325		2,333		10,567		7,065		6,218		2,870
Other		321		99		135		500		334		819		80
Total Interest Income		42,359		37,782		33,517		114,835		95,104		51,992		34,694

INTEREST EXPENSE
Deposits		5,984		3,456		3,417		12,598		10,601		16,374		3,158
Notes Payable		—		—		—		—		61		263		—
FHLB Advances		329		167		213		646		669		861		150
Subordinated Debentures		1,242		1,219		1,214		3,658		3,411		983		1,197
Federal Funds Purchased		709		410		—		1,128		6		4,944		9
Total Interest Expense		8,264		5,252		4,844		18,030		14,748		23,425		4,514

NET INTEREST INCOME		34,095		32,530		28,673		96,805		80,356		28,567		30,180
Provision for Loan Losses		1,500		3,025		1,300		6,200		4,000
Provision for Credit Losses												625		1,675

NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES		32,595		29,505		27,373		90,605		76,356
PROVISION FOR CREDIT LOSSES												27,942		28,505

NONINTEREST INCOME
Customer Service Fees		313		298		268		892		733		349		281
Net Gain on Sales of Available for Sale Securities		—		52		48		52		750
Net Loss on Sales of Available for Sale Securities												(56)		—
Other Income		1,074		1,300		1,094		3,650		2,538		1,650		1,276
Total Noninterest Income		1,387		1,650		1,410		4,594		4,021		1,943		1,557

NONINTEREST EXPENSE
Salaries and Employee Benefits		9,449		8,977		8,309		27,120		22,923		8,815		8,694
Occupancy and Equipment		1,086		1,042		942		3,213		2,977		1,209		1,085
Other Expense		3,622		3,733		3,985		11,084		9,736		4,159		3,729
Total Noninterest Expense		14,157		13,752		13,236		41,417		35,636		14,183		13,508

INCOME BEFORE INCOME TAXES		19,825		17,403		15,547		53,782		44,741		15,702		16,554
Provision for Income Taxes		5,312		4,521		4,038		14,125		11,568		4,060		4,292
NET INCOME		14,513		12,882		11,509		39,657		33,173	$	11,642	$	12,262
Preferred Stock Dividends		(1,013)		(1,014)		—		(3,040)		—		(1,013)		(1,013)
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS	$	13,500	$	11,868	$	11,509	$	36,617	$	33,173	$	10,629	$	11,249

EARNINGS PER SHARE
Basic	$	0.49	$	0.43	$	0.41	$	1.32	$	1.18	$	0.38	$	0.40
Diluted		0.47		0.41		0.40		1.27		1.14	$	0.37	$	0.39

See accompanying notes to consolidated financial statements.

Table of Contents

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

Bridgewater Bancshares, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income

(dollars in thousands)

(Unaudited)


	Three Months Ended				Nine Months Ended				Three Months Ended
	September 30,				September 30,				March 31,
	2022		2021		2022		2021		2023		2022
Net Income	$	14,513	$	11,509	$	39,657	$	33,173	$	11,642	$	12,262
Other Comprehensive Income (Loss):
Unrealized Gains (Losses) on Available for Sale Securities		(18,073)		(237)		(56,487)		114		5,243		(23,013)
Unrealized Gains (Losses) on Cash Flow Hedges		7,725		242		21,117		3,295		(4,169)		9,029
Reclassification Adjustment for (Gains) Losses Realized in Income		(119)		358		511		329		(1,011)		423
Income Tax Impact		4,808		(73)		9,133		(785)		(17)		2,848
Total Other Comprehensive Income (Loss), Net of Tax		(5,659)		290		(25,726)		2,953		46		(10,713)
Comprehensive Income	$	8,854	$	11,799	$	13,931	$	36,126	$	11,688	$	1,549

See accompanying notes to consolidated financial statements.

Table of Contents

Bridgewater Bancshares, Inc. and Subsidiaries

Consolidated Statements of Shareholders’ Equity

Three ~~and Nine~~ Months Ended ~~September 30,~~March 31, 2023 and 2022 ~~and 2021~~

(dollars in thousands, except share data)

(Unaudited)


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

BALANCE June 30, 2021	$	—	28,162,777	$	282	$	104,811	$	176,495	$	9,242	$	290,830
Stock-based Compensation		—	4,552		—		608		—		—		608
Comprehensive Income (Loss)		—	—		—		—		11,509		290		11,799
Preferred Stock Offering, Net of Issuance Costs		66,515	—		—		—		—		—		66,515
Stock Options Exercised		—	26,000		—		89		—		—		89
Stock Repurchases		—	(126,507)		(1)		(2,037)		—		—		(2,038)
BALANCE September 30, 2021	$	66,515	28,066,822	$	281	$	103,471	$	188,004	$	9,532	$	367,803

BALANCE June 30, 2022	$	66,514	27,677,372	$	277	$	96,689	$	222,464	$	(11,061)	$	374,883
Stock-based Compensation		—	4,744		—		876		—		—		876
Comprehensive Income (Loss)		—	—		—		—		14,513		(5,659)		8,854
Stock Options Exercised		—	3,250		—		41		—		—		41
Stock Repurchases		—	(99,310)		(1)		(1,615)		—		—		(1,616)
Vested Restricted Stock Units		—	3,000		—		—		—		—		—
Restricted Shares Withheld for Taxes		—	(1,078)		—		(18)		—		—		(18)
Preferred Stock Dividend		—	—		—		—		(1,013)		—		(1,013)
BALANCE September 30, 2022	$	66,514	27,587,978	$	276	$	95,973	$	235,964	$	(16,720)	$	382,007

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

BALANCE December 31, 2020	$	—	28,143,493	$	281	$	103,714	$	154,831	$	6,579	$	265,405
Stock-based Compensation		—	14,408		—		1,765		—		—		1,765
Comprehensive Income		—	—		—		—		33,173		2,953		36,126
Preferred Stock Offering, Net of Issuance Costs		66,515	—		—		—		—		—		66,515
Stock Options Exercised		—	52,400		1		242		—		—		243
Stock Repurchases		—	(143,125)		(1)		(2,245)		—		—		(2,246)
Restricted Shares Withheld for Taxes		—	(354)		—		(5)		—		—		(5)
BALANCE September 30, 2021	$	66,515	28,066,822	$	281	$	103,471	$	188,004	$	9,532	$	367,803

BALANCE December 31, 2021	$	66,514	28,206,566	$	282	$	104,123	$	199,347	$	9,006	$	379,272	$	66,514	28,206,566	$	282	$	104,123	$	199,347	$	9,006	$	379,272
Stock-based Compensation		—	14,400		—		2,557		—		—		2,557		—	4,656		—		831		—		—		831
Comprehensive Income (Loss)		—	—		—		—		39,657		(25,726)		13,931		—	—		—		—		12,262		(10,713)		1,549
Stock Options Exercised		—	28,000		—		106		—		—		106		—	10,000		—		21		—		—		21
Stock Repurchases		—	(662,765)		(6)		(10,772)		—		—		(10,778)		—	(71,038)		—		(1,203)		—		—		(1,203)
Forfeiture of Restricted Stock Awards		—	(1,000)		—		(3)		—		—		(3)		—	(400)		—		(1)		—		—		(1)
Vested Restricted Stock Units		—	5,100		—		—		—		—		—		—	1,500		—		—		—		—		—
Restricted Shares Withheld for Taxes		—	(2,323)		—		(38)		—		—		(38)		—	(895)		—		(15)		—		—		(15)
Preferred Stock Dividend		—	—		—		—		(3,040)		—		(3,040)		—	—		—		—		(1,013)		—		(1,013)
BALANCE September 30, 2022	$	66,514	27,587,978	$	276	$	95,973	$	235,964	$	(16,720)	$	382,007
BALANCE March 31, 2022														$	66,514	28,150,389	$	282	$	103,756	$	210,596	$	(1,707)	$	379,441

BALANCE December 31, 2022														$	66,514	27,751,950	$	278	$	96,529	$	248,685	$	(17,942)	$	394,064
Cumulative Effect of Change in Accounting Principal, Net of Tax															—	—		—		—		(3,920)		—		(3,920)
Balance as of January 1, 2023, as Adjusted for Change in Accounting Principal															66,514	27,751,950		278		96,529		244,765		(17,942)		390,144
Stock-based Compensation															—	10,608		—		941		—		—		941
Comprehensive Income															—	—		—		—		11,642		46		11,688
Stock Options Exercised															—	82,000		—		261		—		—		261
Vested Restricted Stock Units															—	1,625		—		—		—		—		—
Restricted Shares Withheld for Taxes															—	(939)		—		(15)		—		—		(15)
Preferred Stock Dividend															—	—		—		—		(1,013)		—		(1,013)
BALANCE March 31, 2023														$	66,514	27,845,244	$	278	$	97,716	$	255,394	$	(17,896)	$	402,006

See accompanying notes to consolidated financial statements.

Table of Contents

Bridgewater Bancshares, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(dollars in thousands)

(Unaudited)


	Nine Months Ended				Three Months Ended
	September 30,				March 31,
	2022		2021		2023		2022
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income	$	39,657	$	33,173	$	11,642	$	12,262
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Net Amortization on Securities Available for Sale		1,712		2,567		101		681
Net Gain on Sales of Securities Available for Sale		(52)		(750)
Provision for Loan Losses		6,200		4,000
Net Loss on Sales of Securities Available for Sale						56		—
Provision for Credit Losses on Loans						1,500		1,675
Provision (Credit) for Off-Balance Sheet Exposures						(875)		—
Depreciation of Premises and Equipment		1,911		1,755		651		628
Amortization of Other Intangible Assets		143		143		48		48
Amortization of Right-of use asset						125		—
Amortization of Subordinated Debt Issuance Costs		320		299		96		110
Stock-based Compensation		2,557		1,765		941		831
Changes in Operating Assets and Liabilities:
Accrued Interest Receivable and Other Assets		(7,859)		(6,957)		(6,369)		(1,377)
Accrued Interest Payable and Other Liabilities		35,780		7,876		(118)		16,423
Net Cash Provided by Operating Activities		80,369		43,871		7,798		31,281

CASH FLOWS FROM INVESTING ACTIVITIES
Decrease in Bank-Owned Certificates of Deposit		694		983
(Increase) Decrease in Bank-Owned Certificates of Deposit						(44)		737
Proceeds from Sales of Securities Available for Sale		25,066		11,877		19,959		—
Proceeds from Maturities, Paydowns, Payups and Calls of Securities Available for Sale		30,253		33,250		7,055		8,531
Purchases of Securities Available for Sale		(210,432)		(64,669)		(32,689)		(51,449)
Net Increase in Loans		(560,786)		(384,476)		(114,711)		(168,968)
Net Increase in FHLB Stock		(10,361)		(415)		(9,026)		(1,604)
Purchases of Premises and Equipment		(1,457)		(571)		(7)		(277)
Purchase of Bank-Owned Life Insurance		(7,407)		(25,166)
Net Cash Used in Investing Activities		(734,430)		(429,187)		(129,463)		(213,030)

CASH FLOWS FROM FINANCING ACTIVITIES
Net Increase in Deposits		358,837		352,521
Net (Increase) Decrease in Deposits						(5,420)		89,374
Net Increase in Federal Funds Purchased		212,000		—		150,000		23,000
Principal Payments on Notes Payable		—		(11,000)
Proceeds from FHLB Advances		29,000		—		155,500		—
Principal Payments on FHLB Advances		—		(10,000)		(55,500)		—
Issuance of Preferred Stock, net of Issuance Costs		—		66,515
Preferred Stock Dividends Paid		(3,040)		—		(1,013)		(1,013)
Issuance of Subordinated Debt, net of Issuance Costs		—		29,365
Redemption of Subordinated Debt		—		(11,250)
Stock Options Exercised		106		243		261		21
Stock Repurchases		(10,778)		(2,246)		—		(1,203)
Forfeiture of Restricted Stock Awards		(3)		—		—		(1)
Shares Repurchased for Tax Withholdings Upon Vesting of Restricted Stock-Based Awards		(38)		(5)		(14)		(15)
Net Cash Provided by Financing Activities		586,084		414,143		243,814		110,163

NET CHANGE IN CASH AND CASH EQUIVALENTS		(67,977)		28,827		122,149		(71,586)
Cash and Cash Equivalents Beginning		143,473		160,675		87,043		143,473
Cash and Cash Equivalents Ending	$	75,496	$	189,502	$	209,192	$	71,887

SUPPLEMENTAL CASH FLOW DISCLOSURE
Cash Paid for Interest	$	16,905	$	14,408	$	22,903	$	4,238
Cash Paid for Income Taxes		14,155		15,176		39		40
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Net Investment Securities Purchased but Not Settled		5,731		5,432	$	—	$	503

See accompanying notes to consolidated financial statements.

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Bridgewater Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

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

Organization

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

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

Basis of Presentation

The accompanying unaudited consolidated financial statements were prepared in accordance with instructions for Form 10-Q and, therefore, do not include all disclosures necessary for a complete presentation of the consolidated balance sheets, consolidated statements of income, consolidated statements of comprehensive income, consolidated statements of shareholders’ equity and consolidated statements of cash flows in conformity with U.S. generally accepted accounting principles (“GAAP”). However, all normal recurring adjustments which are, in the opinion of management, necessary for the fair presentation of the interim financial statements have been included. The results of operations for the ~~three and nine-month periods~~three-month period ended ~~September 30, 2022~~March 31, 2023 are not necessarily indicative of the results which may be expected for the entire year. For further information, refer to the consolidated financial statements and footnotes included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March ~~8, 2022.~~7, 2023.

Principles of Consolidation

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

Use of Estimates in Preparation of Financial Statements

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

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Material estimates that are particularly susceptible to significant change in the near term include the determination of the allowance for ~~loan~~credit 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 ~~$1.24~~$1.235 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.

Allowance for Credit Losses

Securities Available for Sale

For any securities classified as available for sale that are in an unrealized loss position at the balance sheet date, the Company assesses whether or not it intends to sell the security, or if it is more likely than not it will be required to sell the security, before recovery of its amortized cost basis. If either criteria is met, the security's amortized cost basis is written down to fair value through income with the establishment of an allowance. For securities that do not meet the aforementioned criteria, the Company evaluates whether any portion of the decline in fair value is the result of credit deterioration. In making this assessment, management considers the extent to which the amortized cost of the security exceeds its fair value, changes in credit ratings and any other known adverse conditions related to the specific security, among other factors. If the assessment indicates that a credit loss exists, an allowance for credit losses, or ACL, is recorded for the amount by which the amortized cost basis of the security exceeds the present value of cash flows expected to be collected, limited by the amount by which the amortized cost exceeds fair value. Any impairment not recognized in the allowance for credit losses is recognized in other comprehensive income.

Changes in the ACL on securities are recorded as a provision for (or reversal of) credit loss expense. Losses are charged against the allowance when management believes the uncollectibility of a security is confirmed or when either of the criteria regarding intent or requirement to sell is met. Accrued interest receivable on securities available for sale is excluded from the estimate of credit losses.

Loans

The ACL on loans is a valuation account that is deducted from the amortized cost basis of loans to present the net amount expected to be collected on loans over their contractual life. The contractual term does not consider

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extensions, renewals or modifications. Loans are charged off against the ACL on loans when management believes the uncollectibility of a loan balance has been confirmed. Recoveries do not exceed the aggregate of amounts previously charged off or expected to be charged off. Subsequent recoveries, if any, are credited to the ACL on loans.

The ACL on loans is measured on a collective or pooled basis when similar risk characteristics exist. The Company’s pooling method is primarily based on loan purpose and collateral type and generally follows the Company’s loan segmentation for regulatory reporting. The Company has identified the following pools of loans with similar risk characteristics for measuring the ACL on loans:

Commercial: Commercial loans generally are loans to sole proprietorships, partnerships, corporations, and other business enterprises to finance working capital, capital investment, or for other business related purposes. Collateral generally consists of pledges of business assets or interests, including but not limited to accounts receivable, inventory, plant and equipment, and real estate interests, if applicable. The primary repayment sources for commercial loans are the cash flow of the operating businesses which can be adversely affected by company, industry and economic business cycles. Commercial loans may be secured or unsecured.

Paycheck Protection Program (PPP): PPP loans are loans to businesses, sole proprietorships, independent contractors and self-employed individuals who met certain criteria and eligibility requirements through a loan program established by the CARES Act and administered through the Small Business Administration, or SBA. In 2021, the PPP loan program ended and the Company is no longer originating loans under this program. Credit risk in these loans is limited due to a full guarantee by the U.S. Government.

Construction and Land Development: Construction and land development loans are generally loans to finance land development or the construction of industrial, commercial, or multifamily buildings. Construction loans can include construction of new structures, additions or alterations to existing structures, or the demolition of existing structures to make way for new structures. Construction loans are generally secured by real estate. The primary risk characteristics are specific to the uncertainty on whether the construction will be completed according to the specifications and schedules and the reliance on the sale of the completed project as the primary repayment source for the loan. Factors that may influence the completion of construction may be customer specific, such as the quality and depth of property management, or related to changes in general economic conditions. Trends in the commercial and residential construction industries can significantly impact the credit quality of these loans due to supply and demand imbalances. In addition, fluctuations in real estate values can significantly impact the credit quality of these loans, as property values may determine the economic viability of construction projects and adversely impact the value of the collateral securing the loan.

1-4 Family Construction: 1-4 family construction loans are generally loans to finance the construction of new structures, additions or alterations to existing structures, or the demolition of existing structures to make way for new structures. Construction loans are generally secured by real estate. The primary risk characteristics are specific to the uncertainty on whether the construction will be completed according to the specifications and schedules. Factors that may influence the completion of construction may be customer specific or related to changes in general economic conditions.

1-4 Family Mortgage: 1-4 family mortgage loans are generally loans to finance loans on owner occupied and nonowner occupied properties. 1-4 family mortgage loans are secured by first or second liens on the property. The degree of risk in residential mortgage lending involving owner occupied properties depends primarily on the borrower’s ability to repay and the loan amount in relation to collateral value. Economic trends determined by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans. Weak economic trends indicate that the borrower’s capacity to repay their obligations may be deteriorating. 1-4 family mortgage loans includes credits to finance nonowner occupied properties used as rentals. These loans can involve additional risks as the borrower’s ability to repay is based on the net operating income from the property which can be impacted by occupancy levels, rental rates, and operating expenses. Declines in net operating income can negatively impact the value of the property which increases the credit risk in the event of default.

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Multifamily: Multifamily loans are loans to finance multifamily properties. The primary source of repayment for multifamily loans is the cash flows of the underlying property. The primary risk characteristics include increases in vacancy rates, overbuilt supply, interest rates or changes in general economic conditions. Economic factors such as unemployment, wage growth and home affordability can impact vacancy rates and property cash flow.

Commercial Real Estate (CRE) Owner Occupied: Owner occupied commercial real estate loans are properties that are owned and operated by the borrower and the primary source for repayment is the cash flow from the ongoing operations and activities conducted by the borrower’s business. The primary risk characteristics are specific to the underlying business and its ability to generate sustainable profitability and positive cash flow. Also, certain types of businesses also may require specialized facilities that can increase costs and may not be economically feasible to an alternative user, which could adversely impact the market value of the collateral. Factors that may influence a borrower's ability to repay their loan include demand for the business’ products or services, the quality and depth of management, the degree of competition, regulatory changes, and general economic conditions.

Commercial Real Estate (CRE) Nonowner Occupied: Nonowner occupied commercial real estate loans are investment properties and the primary source for repayment of the loan is derived from rental income associated with the property or proceeds of the sale of the property. Nonowner occupied commercial real estate loans consist of mortgage loans to finance investments in real property that may include, but are not limited to, commercial/retail office space, industrial/warehouse space, hotels, assisted living facilities and other specific use properties. The primary risk characteristics include impacts of overall leasing rates, absorption timelines, levels of vacancy rates and operating expenses, and general economic conditions. Banks that are concentrated in commercial real estate lending are subject to additional regulatory scrutiny and must employ enhanced risk management practices.

Consumer and Other: Consumer and other loans generally include personal lines of credit and amortizing loans made to qualified individuals for various purposes such as auto loans, debt consolidation loans, personal expense loans or overdraft protection. The primary risk characteristics associated with consumer and other loans typically include major changes to the borrower’s financial or personal circumstances, including unemployment or other loss of income, unexpected significant expenses, such as for major medical expenses, catastrophic events, divorce or death.

Management assesses the adequacy of the ACL on loans on a quarterly basis. Management estimates the ACL using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. The Company uses the weighted-average remaining maturity, or WARM method as the basis for estimating expected credit losses. The WARM method uses a historical average annual charge off rate. This average annual charge off rate contains loss content over a historical lookback period and is used as a foundation for estimating the ACL on loans for the remaining outstanding balances of loans by segment at the balance sheet date. The average annual charge off rate is applied to the contractual term, further adjusted for estimated prepayments, to determine the unadjusted historical charge off rate. The calculation of the unadjusted historical charge off rate is then adjusted for current conditions and for reasonable and supportable forecast periods through qualitative factors prior to being applied to the current balance of the loan segments. Accrued interest receivable on loans available for sale is excluded from the estimate of credit losses.

Forecast adjustments to the historical loss rate are based on a forecast of the U.S. national unemployment rate, a forecast of the difference between the 10-year and 3-month treasury rates, and the most recent available BBB rated corporate bond spreads to U.S. Treasury securities, or BBB Spread. The forecast overlay adjustment for the reasonable and supportable forecast assumes an immediate reversion after a one-year forecast period to historical loss rates for the remaining life of the respective loan segment.

Qualitative factors are used to cover losses that are expected but, in the Company’s assessment, may not be adequately represented in the quantitative analysis or the forecasts described above. These qualitative factors serve to compensate for additional areas of uncertainty inherent in the portfolio that are not reflected in the historic loss factors. Each qualitative loss factor, for each loan segment within the portfolio, incorporates consideration for a minimum to maximum range for loss factors. These qualitative factor adjustments may increase or decrease the Company’s estimate of expected credit losses and are applied to each loan segment. The qualitative factors applied to each loan segment include changes in lending policies and procedures, general economic and business conditions, the nature, volume and

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terms of loans, the experience, depth and ability of lending staff, the quality of the loan review function, the value of underlying collateral, competition, legal and regulatory factors, the volume and severity of watchlist and past due loans, and the level of concentrations.

Loans that do not share risk characteristics are evaluated on an individual basis. Loans evaluated individually are not included in the pooled evaluation and typically represent collateral dependent loans but may also include other nonperforming loans or modifications. The Company has elected to use the practical expedient to measure individually evaluated loans as collateral dependent when repayment is expected to be provided substantially through the operation or sale of the collateral. The credit loss is measured as the difference between the amortized cost basis of the loan and the fair value of the underlying collateral. The fair value of the collateral is adjusted for the estimated cost to sell if repayment or satisfaction of a loan is dependent on the sale of the collateral.

Management may also adjust its assumptions to account for differences between expected and actual losses from period to period. The variability of management’s assumptions could alter the ACL on loans materially and impact future results of operations and financial condition. The loss estimation models and methods used to determine the allowance for credit losses are continually refined and enhanced.

Off-Balance Sheet Credit Exposures

The Company maintains a separate ACL on off-balance sheet credit exposures, including unfunded loan commitments, financial guarantees, and letters of credit, which is included in other liabilities on the consolidated balance sheet, unless the obligation is unconditionally cancellable. The ACL on off-balance sheet credit exposures is adjusted as a provision for (or reversal of) credit loss expense. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over the estimated life of such commitments. The allowance is calculated using the same aggregate reserve rates calculated for the funded portion of the loan segment and applied to the amount of commitments expected to fund.

Impact of Recently ~~Issued~~Adopted Accounting Guidance

On January 1, 2023, the Company adopted Accounting Standards Update (“ASU”) No. 2016-13 “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses of Financial Instruments,” as amended, which replaces the incurred loss methodology with an expected loss methodology that is commonly referred to as the current expected credit loss, or CECL, methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and held-to maturity debt securities. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments). In addition, CECL made changes to the accounting for available-for-sale debt securities. One such change is to require credit losses to be presented as an allowance rather than as a write-down on available for sale debt securities if management does intend to sell or believes that it is more likely than not they will be required to sell.

The Company adopted CECL using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures. Results for reporting periods beginning after January 1, 2023 are presented under CECL while prior period amounts continue to be reported in accordance with previously applicable GAAP. The Company recorded a net decrease to retained earnings of $3.9 million as of January 1, 2023 for the cumulative effect of adopting CECL. The transition adjustment included a $650,000 impact due to the increase in ACL related to loans, a $4.8 million impact due the establishment of the allowance for off-balance sheet credit exposures, and a $1.6 million impact on deferred taxes.

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The following table presents the impact of adopting CECL:


	January 1, 2023		Impact of		As Reported
(dollars in thousands)	Pre-CECL Adoption		CECL Adoption		Under CECL
Assets:
Loans
Commercial	$	6,500	$	(1,157)	$	5,343
Paycheck Protection Program		1		(1)		—
Construction and Land Development		3,911		(1,070)		2,841
1-4 Family Construction		845		(235)		610
Real Estate Mortgage:
1-4 Family Mortgage		4,325		(1,778)		2,547
Multifamily		17,459		3,318		20,777
CRE Owner Occupied		1,965		(943)		1,022
CRE Nonowner Occupied		12,576		2,869		15,445
Consumer and Other		151		(90)		61
Unallocated		263		(263)		—
Allowance for Credit Losses on Loans	$	47,996	$	650	$	48,646

Liabilities:
Allowance for Credit Losses on Off-balance Sheet Credit Exposures	$	360	$	4,850	$	5,210

In March 2022, the ~~FASB~~Company issued ASU No. 2022-02, Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. This ASU updates guidance in Topic 326 to eliminate the accounting guidance for ~~TDRs~~troubled debt restructurings by creditors in Subtopic 310-40, Receivables – Troubled Debt Restructurings by Creditors, while enhancing disclosure requirements for certain loan refinancing and restructuring activities by creditors when a borrower is experiencing financial difficulty. Additionally, the amendments to ASC 326 require that an entity disclose current period gross write offs by year of origination within the vintage disclosures, which requires that an entity disclose the amortized cost basis of financing receivables by credit quality indicator and class of financing receivables by year of origination. The Company adopted this standard during the first quarter of 2023 and the adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

Impact of Recently Issued Accounting Guidance

In March 2023, the Financial Accounting Standards Board (“FASB”) issued ASU ~~2022-02 is~~No. 2023-01, Leases (Topic 842): Common Control Arrangements. The FASB issued guidance clarifies the accounting for leasehold improvements associated with common control leases, by requiring that leasehold improvements associated with common control leases be amortized by the lessee over the useful life of the leasehold improvements to the common control group (regardless of the lease term) as long as the lessee controls the use of the underlying asset through a lease. Additionally, leasehold improvements associated with common control leases should be accounted for as a transfer between entities under common control through an adjustment to equity if, and when, the lessee no longer controls the use of the underlying asset. The amendments in this ASU are effective for ~~fiscal years~~annual and interim periods beginning after December 15, ~~2022~~2023 and are not expected to have a material impact on the Company’s consolidated financial statements.

In March 2023, the FASB issued ASU No. 2023-02, Investments Equity Method and Joint Ventures (Topic 323): Accounting for ~~companies that have adopted CECL,~~Investments in Tax Credit Structures Using the Proportional Amortization Method. These amendments allow reporting entities to elect to account for qualifying tax equity investments using the proportional amortization method, regardless of the program giving rise to the related income tax credits. This guidance is effective for public business entities for fiscal years including interim periods within those fiscal years, ~~with early~~beginning after December 15, 2023. Early adoption ~~permitted.~~

~~In June 2016, the FASB issued~~is permitted in any interim period. The Company is assessing ASU ~~2016-13,~~ ~~Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses~~2023-02 and its impact on ~~Financial Instruments~~ ~~(modified by ASU 2018-19,~~ ~~Codification Improvements to Topic 326, Financial Instruments – Credit Losses,~~ ~~ASU 2019-04,~~ ~~Codification Improvements to Topic 326, Financial Instruments Credit Losses~~~~, ASU 2019-05,~~ ~~Financial Instruments Credit Losses – Targeted Transition Relief~~,its accounting and ~~ASU 2019-11,~~ ~~Codification Improvements to Topic 326, Financial Instruments – Credit Losses~~).The amendments in this ASU affect all entities that measure credit losses on financial instruments including loans, debt securities, trade receivables, net investments in leases, off-balance sheet credit exposures, reinsurance receivables, and any other financial asset that has a contractual right to receive cash that is not specifically excluded. The main objective of this ASU is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. To achieve this objective, the amendments in this ASU replace the incurred loss impairment methodology required in current GAAP with a methodology that reflects expected credit losses that requires consideration of a broader range of reasonable and supportable information to estimate credit losses. The amendments in this ASU will affect entities todisclosures.

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varying degrees depending on the credit quality of the assets held by the entity, the duration of the assets held, and how the entity applies the current incurred loss methodology. In November 2019, the FASB issued ASU 2019-10, ~~Financial Instruments — Credit Losses (Topic 326), Derivatives and Hedging (815), and Leases (Topic 842) – Effective Dates.~~ This ASU amended the effective date of ASU 2016-13 for smaller reporting companies and non-SEC reporting entities. The amendment delays the effective date to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. As an emerging growth company, t~~he Company is required to implement by January 1, 2023 and is currently evaluating the impact on its consolidated financial statements.~~ 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 has contracted with a third party to develop a model to comply with CECL requirements. The Company has established a steering committee with representation from various departments across the enterprise. While the Company has not finalized the impact of implementing CECL, the Company expects to recognize a one-time cumulative effect adjustment to the allowance and beginning retained earnings upon adoption. The future impact of CECL on the Company’s allowance for credit losses and provision expense subsequent to initial adoption will depend on changes in the loan portfolio, economic conditions and refinements to key assumptions including forecasting and qualitative factors.

Subsequent Events

Subsequent events have been evaluated through ~~November 3, 2022,~~May 4, 2023, which is the date the consolidated financial statements were available to be issued.

Note 2: Earnings Per Share

Basic earnings per common share are computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per common share are computed by dividing net income by the weighted average number of common shares adjusted for the dilutive effect of stock compensation. For the three ~~and nine~~ months ended ~~September 30, 2022,~~March 31, 2023, stock options, restricted stock awards and restricted stock units of approximately ~~300,500~~621,994 shares were excluded from the calculation because they were deemed to be anti-dilutive. For the three ~~and nine~~ months ended ~~September 30, 2021,~~March 31, 2022, stock options, restricted stock awards and restricted stock units of approximately ~~55,000~~305,000 shares were excluded from the 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 nine~~ months ended ~~September 30, 2022~~March 31, 2023 and ~~2021:~~2022:


	Three Months Ended				Nine Months Ended				Three Months Ended
	September 30,				September 30,				March 31,
(dollars in thousands, except per share data)	2022		2021		2022		2021		2023		2022
Net Income Available to Common Shareholders	$	13,500	$	11,509	$	36,617	$	33,173	$	10,629	$	11,249
Weighted Average Common Stock Outstanding:
Weighted Average Common Stock Outstanding (Basic)		27,520,117		28,047,280		27,825,517		28,035,246		27,726,894		28,123,809
Dilutive Effect of Stock Compensation		1,072,737		1,063,267		1,057,184		1,042,604		763,152		1,032,276
Weighted Average Common Stock Outstanding (Dilutive)		28,592,854		29,110,547		28,882,701		29,077,850		28,490,046		29,156,085

Basic Earnings per Common Share	$	0.49	$	0.41	$	1.32	$	1.18	$	0.38	$	0.40
Diluted Earnings per Common Share		0.47		0.40		1.27		1.14		0.37		0.39

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, 2023 and December 31, 2022:


	March 31, 2023
			Gross		Gross
	Amortized		Unrealized		Unrealized
(dollars in thousands)	Cost		Gains		Losses		Fair Value
Securities Available for Sale:
U.S. Treasury Securities	$	2,762	$	4	$	(27)	$	2,739
Municipal Bonds		146,810		5		(20,217)		126,598
Mortgage-Backed Securities		240,517		2,376		(15,655)		227,238
Corporate Securities		127,170		42		(9,317)		117,895
SBA Securities		30,331		605		(137)		30,799
Asset-Backed Securities		54,424		234		(497)		54,161
Total Securities Available for Sale	$	602,014	$	3,266	$	(45,850)	$	559,430

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	December 31, 2022
			Gross		Gross
	Amortized		Unrealized		Unrealized
(dollars in thousands)	Cost		Gains		Losses		Fair Value
Securities Available for Sale:
U.S. Treasury Securities	$	2,621	$	—	$	(41)	$	2,580
Municipal Bonds		156,506		62		(25,214)		131,354
Mortgage-Backed Securities		252,919		2,465		(17,600)		237,784
Corporate Securities		116,871		45		(7,089)		109,827
SBA Securities		20,957		79		(159)		20,877
Asset-Backed Securities		46,623		188		(620)		46,191
Total Securities Available for Sale	$	596,497	$	2,839	$	(50,723)	$	548,613

Securities with a carrying value of $234.5 million at March 31, 2023 were pledged to secure borrowing capacity at the Federal Reserve Discount Window. The securities portfolio was unencumbered as of December 31, 2022.

The following tables present the fair value and gross unrealized losses of securities with unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at March 31, 2023 and December 31, 2022:


		Less Than 12 Months				12 Months or Greater				Total
	Number of			Unrealized				Unrealized				Unrealized
(dollars in thousands, except number of holdings)	Holdings	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
March 31, 2023
U.S. Treasury Securities	5	$	2,762	$	(27)	$	—	$	—	$	2,762	$	(27)
Municipal Bonds	212		22,283		(758)		101,927		(19,459)		124,210		(20,217)
Mortgage-Backed Securities	124		60,388		(2,220)		103,245		(13,435)		163,633		(15,655)
Corporate Securities	106		82,071		(4,981)		31,507		(4,336)		113,578		(9,317)
SBA Securities	48		1,964		(6)		8,826		(131)		10,790		(137)
Asset-Backed Securities	25		26,662		(246)		11,182		(251)		37,844		(497)
Total Securities Available for Sale	520	$	196,130	$	(8,238)	$	256,687	$	(37,612)	$	452,817	$	(45,850)


		Less Than 12 Months				12 Months or Greater				Total
	Number of			Unrealized				Unrealized				Unrealized
(dollars in thousands, except number of holdings)	Holdings	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
December 31, 2022
U.S. Treasury Securities	6	$	2,330	$	(41)	$	—	$	—	$	2,330	$	(41)
Municipal Bonds	225		59,912		(5,321)		69,424		(19,893)		129,336		(25,214)
Mortgage-Backed Securities	130		123,224		(5,427)		62,882		(12,173)		186,106		(17,600)
Corporate Securities	100		88,486		(5,121)		17,054		(1,968)		105,540		(7,089)
SBA Securities	49		2,498		(6)		9,750		(153)		12,248		(159)
Asset-Backed Securities	20		21,919		(396)		6,186		(224)		28,105		(620)
Total Securities Available for Sale	530	$	298,369	$	(16,312)	$	165,296	$	(34,411)	$	463,665	$	(50,723)

Beginning January 1, 2023, the Company evaluates all securities quarterly to determine if any securities in a loss position require an allowance for credit losses on securities in accordance with ASC 326 - Measurement of Credit Losses on Financial Instruments.

1015

Table of Contents

At March 31, 2023, 520 debt securities had unrealized losses with aggregate depreciation of approximately 9.2% from the Company’s amortized cost basis. These unrealized losses have not been recognized into income because management does not intend to sell these securities, and it is not more likely than not it will be required to sell the securities before recovery of its amortized cost basis. Furthermore, the unrealized losses are due to changes in interest rates and other market conditions and were not reflective of credit events. To make this determination, consideration is given to such factors as the credit rating of the issuer, level of credit enhancement, changes in credit ratings, market conditions such as current interest rates, any adverse conditions specific to the security, and delinquency status on contractual payments. As of March 31, 2023, there was no allowance for credit losses carried on the Company’s securities portfolio.

Accrued interest receivable on securities, which is recorded within accrued interest on the balance sheet, totaled $3.9 million at March 31, 2023 and is excluded from the estimate of credit losses.

At December 31, 2022, 530 debt securities had unrealized losses with aggregate depreciation of approximately 9.9% from the Company’s amortized cost basis. For periods prior to the adoption of ASC 326, management conducted a quarterly review and evaluation of its securities for other than temporary impairment. In analyzing whether unrealized losses on debt securities were other than temporary, management considered the length of time and the extent to which the fair value was less than amortized cost, 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, the quality of any underlying assets or credit enhancements, and the Company’s intent and ability to hold the security for a period of time sufficient to allow for a recovery in fair value. No declines were deemed to be other than temporary as of December 31, 2022.

The following table presents a summary of amortized cost and estimated fair value of debt securities by the lesser of expected call date or contractual maturity as of March 31, 2023. Call date is used when a call of the debt security is expected, as determined by the Company when the security has a market value above its amortized cost. Contractual maturities will differ from expected maturities for mortgage-backed, SBA securities and asset-backed securities because borrowers may have the right to call or prepay obligations without penalties.


(dollars in thousands)	Amortized Cost		Fair Value
March 31, 2023
Due in One Year or Less	$	5,331	$	5,328
Due After One Year Through Five Years		34,902		33,134
Due After Five Years Through 10 Years		165,874		151,432
Due After 10 Years		70,635		57,338
Subtotal		276,742		247,232
Mortgage-Backed Securities		240,517		227,238
SBA Securities		30,331		30,799
Asset-Backed Securities		54,424		54,161
Totals	$	602,014	$	559,430

The following table presents a summary of the proceeds from sales of securities available for sale, as well as gross gains and losses, for the three months ended March 31, 2023 and 2022:


	Three Months Ended
	March 31,
(dollars in thousands)	2023		2022
Proceeds From Sales of Securities	$	19,959	$	—
Gross Gains on Sales		197		—
Gross Losses on Sales		(253)		—

Table of Contents

Note ~~3: Securities~~4: Loans and Allowance for Credit Losses

The following ~~tables present~~table presents the ~~amortized cost and estimated fair value~~components of ~~securities with gross unrealized gains and losses~~the loan portfolio at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021:~~2022:

September 30, 2022

Gross

Gross

Amortized

Unrealized

Unrealized

(dollars in thousands)

Cost

Gains

Losses

Fair Value
Securities Available for Sale:

U.S. Treasury Securities

$
2,374

$
—

$
(36)

$
2,338
Municipal Bonds

196,102

54

(25,920)

170,236
Mortgage-Backed Securities

207,973

8

(16,396)

191,585
Corporate Securities

113,041

39

(5,020)

108,060
SBA Securities

22,585

96

(141)

22,540
Asset-Backed Securities

47,359

348

(459)

47,248
Total Securities Available for Sale

$
589,434

$
545

$
(47,972)

$
542,007

December 31, 2021

Gross

Gross

Amortized

Unrealized

Unrealized

(dollars in thousands)

Cost

Gains

Losses

Fair Value
Securities Available for Sale:

U.S. Treasury Securities

$
756

$
—

$
(2)

$
754
Municipal Bonds

151,665

7,492

(788)

158,369
Mortgage-Backed Securities

125,563

1,085

(2,111)

124,537
Corporate Securities

81,925

2,740

(185)

84,480
SBA Securities

30,474

102

(206)

30,370
Asset-Backed Securities

39,867

1,044

(59)

40,852
Total Securities Available for Sale

$
430,250

$
12,463

$
(3,351)

$
439,362


	March 31,		December 31,
(dollars in thousands)	2023		2022
Commercial	$	454,193	$	435,344
Paycheck Protection Program		963		1,049
Construction and Land Development		312,277		295,554
1-4 Family Construction		85,797		70,242
Real Estate Mortgage:
1-4 Family Mortgage		380,210		355,474
Multifamily		1,320,081		1,306,738
CRE Owner Occupied		158,650		149,905
CRE Nonowner Occupied		962,671		947,008
Total Real Estate Mortgage Loans		2,821,612		2,759,125
Consumer and Other		9,518		8,132
Total Loans, Gross		3,684,360		3,569,446
Allowance for Credit Losses		(50,148)		(47,996)
Net Deferred Loan Fees		(8,735)		(9,293)
Total Loans, Net	$	3,625,477	$	3,512,157

The following tables present the ~~fair value~~aging in past due loans and ~~gross unrealized losses~~nonaccrual status, with and without an ACL, by loan segment as of ~~securities with unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2022~~March 31, 2023 and December 31, ~~2021:~~2022:

Less Than 12 Months

12 Months or Greater

Total

Unrealized

Unrealized

Unrealized
(dollars in thousands)

Fair Value

Losses

Fair Value

Losses

Fair Value

Losses
September 30, 2022

U.S. Treasury Securities

$
2,338

$
(36)

$
—

$
—

$
2,338

$
(36)
Municipal Bonds

135,714

(16,465)

31,839

(9,455)

167,553

(25,920)
Mortgage-Backed Securities

125,805

(6,300)

54,041

(10,096)

179,846

(16,396)
Corporate Securities

93,186

(4,098)

9,549

(922)

102,735

(5,020)
SBA Securities

1,071

(2)

10,645

(139)

11,716

(141)
Asset-Backed Securities

24,382

(330)

2,900

(129)

27,282

(459)
Total Securities Available for Sale

$
382,496

$
(27,231)

$
108,974

$
(20,741)

$
491,470

$
(47,972)


	Accruing Interest
			30-89 Days		90 Days or		Nonaccrual		Nonaccrual
(dollars in thousands)	Current		Past Due		More Past Due		with ACL		without ACL		Total
March 31, 2023
Commercial	$	454,092	$	21	$	—	$	80	$	—	$	454,193
Paycheck Protection Program		963		—		—		—		—		963
Construction and Land Development		312,177		—		—		—		100		312,277
1-4 Family Construction		85,797		—		—		—		—		85,797
Real Estate Mortgage:
1-4 Family Mortgage		380,210		—		—		—		—		380,210
Multifamily		1,320,081		—		—		—		—		1,320,081
CRE Owner Occupied		158,137		—		—		—		513		158,650
CRE Nonowner Occupied		962,671		—		—		—		—		962,671
Consumer and Other		9,518		—		—		—		—		9,518
Totals	$	3,683,646	$	21	$	—	$	80	$	613	$	3,684,360

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Table of Contents

Less Than 12 Months

12 Months or Greater

Total

Unrealized

Unrealized

Unrealized
(dollars in thousands)

Fair Value

Losses

Fair Value

Losses

Fair Value

Losses
December 31, 2021

U.S. Treasury Securities

$
754

$
(2)

$
—

$
—

$
754

$
(2)
Municipal Bonds

44,332

(708)

3,757

(80)

48,089

(788)
Mortgage-Backed Securities

36,921

(630)

35,949

(1,481)

72,870

(2,111)
Corporate Securities

9,398

(133)

1,948

(52)

11,346

(185)
SBA Securities

3,896

(7)

16,297

(199)

20,193

(206)
Asset-Backed Securities

6,742

(59)

—

—

6,742

(59)
Total Securities Available for Sale

$
102,043

$
(1,539)

$
57,951

$
(1,812)

$
159,994

$
(3,351)


	Accruing Interest
			30-89 Days		90 Days or		Nonaccrual		Nonaccrual
(dollars in thousands)	Current		Past Due		More Past Due		with ACL		without ACL		Total
December 31, 2022
Commercial	$	435,274	$	70	$	—	$	—	$	—	$	435,344
Paycheck Protection Program		1,049		—		—		—		—		1,049
Construction and Land Development		295,448		—		—		—		106		295,554
1-4 Family Construction		70,242		—		—		—		—		70,242
Real Estate Mortgage:
HELOC and 1-4 Family Junior Mortgage		36,875		—		—		—		—		36,875
1st REM - 1-4 Family		50,945		—		—		—		—		50,945
LOCs and 2nd REM - Rentals		27,985		—		—		—		—		27,985
1st REM - Rentals		239,553		116		—		—		—		239,669
Multifamily		1,306,738		—		—		—		—		1,306,738
CRE Owner Occupied		149,372		—		—		—		533		149,905
CRE Nonowner Occupied		947,008		—		—		—		—		947,008
Consumer and Other		8,132		—		—		—		—		8,132
Totals	$	3,568,621	$	186	$	—	$	—	$	639	$	3,569,446

~~At September 30, 2022, 564~~The Company aggregates loans into credit quality indicators based on relevant information about the ability of borrowers to service their debt securities had unrealized losses with aggregate depreciation of approximately 8.9% from the Company’s amortized cost basis. At December 31, 2021, 199 debt securities had unrealized losses with aggregate depreciation of approximately 2.1% from the Company’s amortized cost basis. These unrealized losses related principally to changesby using internal reviews in ~~interest rates~~which management monitors and ~~were not due to changes in~~analyzes the financial condition of borrowers and guarantors, trends in the ~~issuer,~~industries in which 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,borrowers operate, and the ~~quality~~fair values of ~~any underlying assets or credit enhancements. Since management has~~collateral securing the ~~ability and intent~~loans. The Company analyzes all loans individually to ~~hold these debt securities for the foreseeable future, no declines were deemed to be other than temporary~~assign a risk rating, grouped into five major categories defined as ~~of September 30, 2022.~~

The following table presents a summary of amortized cost and estimated fair value of debt securities by the lesser of expected call date or contractual maturity as of September 30, 2022. Call date is used when a call of the debt security is expected, as determined by the Company when the security has a market value above its amortized cost. Contractual maturities will differ from expected maturities for mortgage-backed, SBA securities and asset-backed securities because borrowers may have the right to call or prepay obligations without penalties.follows:

(dollars in thousands)

Amortized Cost

Fair Value
September 30, 2022

Due in One Year or Less

$
2,692

$
2,665
Due After One Year Through Five Years

35,380

34,227
Due After Five Years Through 10 Years

158,065

146,852
Due After 10 Years

115,380

96,890
Subtotal

311,517

280,634
Mortgage-Backed Securities

207,973

191,585
SBA Securities

22,585

22,540
Asset-Backed Securities

47,359

47,248
Totals

$
589,434

$
542,007

Pass:A pass loan is a credit with no known or existing potential weaknesses deserving of management’s close attention.

~~As of September 30, 2022 and December 31, 2021, the securities portfolio was unencumbered.~~

~~The following table presents~~Watch:Loans classified as watch have a ~~summary~~potential weakness that deserves management’s close attention. If left uncorrected, this potential weakness may result in deterioration of the ~~proceeds from sales of securities available for sale, as well as gross gains and losses,~~repayment prospects for the ~~three~~loan or of the Company’s credit position at some future date. Watch loans are not adversely classified and ~~nine months ended September 30, 2022~~do not expose the Company to sufficient risk to warrant adverse classification.

Substandard:Loans classified as substandard are not adequately protected by the current net worth and ~~September 30, 2021:~~paying capacity of the borrower or of the collateral pledged, if any. Loans classified as substandard have a well-defined weakness or weaknesses that jeopardize the repayment of the debt. Well defined weaknesses include a borrower’s lack of marketability, inadequate cash flow or collateral support, failure to complete construction on time, or the failure to fulfill economic expectations. They are characterized by the distinct possibility that the Company will sustain loss if the deficiencies are not corrected.

Three Months Ended

Nine Months Ended

September 30,

September 30,
(dollars in thousands)

2022

2021

2022

2021
Proceeds From Sales of Securities

$
—

$
4,119

$
25,066

$
11,877
Gross Gains on Sales

—

498

234

1,200
Gross Losses on Sales

—

(450)

(182)

(450)

Doubtful:Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or repayment in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Loss:Loans classified as loss are considered uncollectible and charged-off immediately.

1218

Table of Contents

~~Note 4: Loans~~The following table presents loan balances classified by credit quality indicators by year of origination as of March 31, 2023:


		March 31, 2023
(dollars in thousands)		2023		2022		2021		2020		2019		Prior		Revolving		Total
Commercial
Pass	$	20,434	$	141,709	$	63,359	$	31,087	$	20,019	$	6,641	$	147,426	$	430,675
Watch		47		646		45		—		9		1,963		2,347		5,057
Substandard		—		11,691		21		66		—		389		6,294		18,461
Total Commercial		20,481		154,046		63,425		31,153		20,028		8,993		156,067		454,193
Current Period Gross Write-offs		—		—		—		—		—		—		—		—

Paycheck Protection Program
Pass		—		—		963		—		—		—		—		963
Total Paycheck Protection Program		—		—		963		—		—		—		—		963
Current Period Gross Write-offs		—		—		—		—		—		—		—		—

Construction and Land Development
Pass		13,589		194,575		85,571		5,166		—		100		12,464		311,465
Watch		—		712		—		—		—		—		—		712
Substandard		—		100		—		—		—		—		—		100
Total Construction and Land Development		13,589		195,387		85,571		5,166		—		100		12,464		312,277
Current Period Gross Write-offs		—		—		—		—		—		—		—		—

1-4 Family Construction
Pass		27,981		29,023		2,983		334		—		—		25,476		85,797
Total 1-4 Family Construction		27,981		29,023		2,983		334		—		—		25,476		85,797
Current Period Gross Write-offs		—		—		—		—		—		—		—		—

Real Estate Mortgage:																—
1-4 Family Mortgage
Pass		22,416		120,225		90,879		60,390		20,349		9,169		55,835		379,263
Watch		—		—		—		—		—		675		—		675
Substandard		—		—		—		272		—		—		—		272
Total 1-4 Family Mortgage		22,416		120,225		90,879		60,662		20,349		9,844		55,835		380,210
Current Period Gross Write-offs		—		—		—		—		—		—		—		—

Multifamily
Pass		81,837		394,113		471,328		268,142		42,593		49,458		9,354		1,316,825
Watch		—		—		3,256		—		—		—		—		3,256
Total Multifamily		81,837		394,113		474,584		268,142		42,593		49,458		9,354		1,320,081
Current Period Gross Write-offs		—		—		—		—		—		—		—		—

CRE Owner Occupied
Pass		17,315		55,530		46,010		21,238		5,309		10,764		880		157,046
Substandard		—		—		513		208		—		883		—		1,604
Total CRE Owner Occupied		17,315		55,530		46,523		21,446		5,309		11,647		880		158,650
Current Period Gross Write-offs		—		—		—		—		—		—		—		—

CRE Nonowner Occupied
Pass		35,112		332,177		301,390		94,350		86,666		71,948		7,333		928,976
Watch		—		12,387		5,487		—		—		—		—		17,874
Substandard		9,773		2,553		—		160		3,335		—		—		15,821
Total CRE Nonowner Occupied		44,885		347,117		306,877		94,510		90,001		71,948		7,333		962,671
Current Period Gross Write-offs		—		—		—		—		—		—		—		—

Total Real Estate Mortgage Loans		166,453		916,985		918,863		444,760		158,252		142,897		73,402		2,821,612

Consumer and Other
Pass		2,600		498		16		1,588		45		—		4,771		9,518
Total Consumer and Other		2,600		498		16		1,588		45		—		4,771		9,518
Current Period Gross Write-offs		1		—		—		—		—		—		3		4
																—
Total Period Gross Write-offs		1		—		—		—		—		—		3		4
Total Loans	$	231,104	$	1,295,939	$	1,071,821	$	483,001	$	178,325	$	151,990	$	272,180	$	3,684,360

Table of Contents

The following table presents the risk category of loans by loan segment as of December 31, 2022:


	December 31, 2022
(dollars in thousands)	Pass		Watch		Substandard		Total
Commercial	$	406,192	$	9,477	$	19,675	$	435,344
Paycheck Protection Program		1,049		—		—		1,049
Construction and Land Development		294,736		712		106		295,554
1-4 Family Construction		70,242		—		—		70,242
Real Estate Mortgage:
HELOC and 1-4 Family Junior Mortgage		36,875		—		—		36,875
1st REM - 1-4 Family		50,271		674		—		50,945
LOCs and 2nd REM - Rentals		27,978		7		—		27,985
1st REM - Rentals		239,277		—		392		239,669
Multifamily		1,303,468		3,270		—		1,306,738
CRE Owner Occupied		148,268		—		1,637		149,905
CRE Nonowner Occupied		922,657		18,112		6,239		947,008
Consumer and Other		8,132		—		—		8,132
Totals	$	3,509,145	$	32,252	$	28,049	$	3,569,446

The following table presents the ~~components of~~activity in the allowance for credit losses, by segment, for the three months ended March 31, 2023. On January 1, 2023, the Company adopted CECL, which added $650,000 to the total ACL. Under CECL, the Company recorded a $1.5 million provision for credit losses on loans during the three months ended March 31, 2023, compared to a $1.7 million provision for loan ~~portfolio at September 30,~~losses in the three months ended March 31, 2022, ~~and December 31, 2021:~~under the incurred loss method.

September 30,

December 31,
(dollars in thousands)

2022

2021
Commercial

$
412,448

$
360,169
Paycheck Protection Program

1,192

26,162
Construction and Land Development

335,557

281,474
Real Estate Mortgage:

1-4 Family Mortgage

341,102

305,317
Multifamily

1,230,509

910,243
CRE Owner Occupied

151,088

111,096
CRE Nonowner Occupied

900,691

818,569
Total Real Estate Mortgage Loans

2,623,390

2,145,225
Consumer and Other

7,495

6,442
Total Loans, Gross

3,380,082

2,819,472
Allowance for Loan Losses

(46,491)

(40,020)
Net Deferred Loan Fees

(9,088)

(9,535)
Total Loans, Net

$
3,324,503

$
2,769,917


			Paycheck		Construction								CRE		CRE
			Protection		and Land		1-4 Family		1--4 Family				Owner		Non-owner		Consumer
(dollars in thousands)	Commercial		Program		Development		Construction		Mortgage		Multifamily		Occupied		Occupied		and Other		Unallocated		Total
Three Months Ended March 31, 2023
Allowance for Credit Losses:
Beginning Balance, Prior to Adoption of CECL	$	6,500	$	1	$	3,911		845	$	4,325	$	17,459	$	1,965	$	12,576	$	151	$	263	$	47,996
Impact of Adopting CECL		(1,157)		(1)		(1,070)		(235)		(1,778)		3,318		(943)		2,869		(90)		(263)		650
Provision for Credit Losses		220		—		328		196		169		212		61		299		15		—		1,500
Loans Charged-off		—		—		—		—		—		—		—		—		(4)		—		(4)
Recoveries of Loans		3		—		—		—		1		—		—		—		2		—		6
Total Ending Allowance Balance	$	5,566	$	—	$	3,169	$	806	$	2,717	$	20,989	$	1,083	$	15,744	$	74	$	—	$	50,148

The following table presents the activity in the allowance for loan losses by portfolio segment for the three months ended ~~September 30,~~March 31, 2022, ~~and 2021:~~prepared using the previous GAAP incurred loss method prior to the adoption of CECL:


			Paycheck		Construction						CRE		CRE										Paycheck		Construction								CRE		CRE
			Protection		and Land		1--4 Family				Owner		Non-owner		Consumer								Protection		and Land		1-4 Family		1--4 Family				Owner		Non-owner		Consumer
(dollars in thousands)	Commercial		Program		Development		Mortgage		Multifamily		Occupied		Occupied		and Other		Unallocated		Total		Commercial		Program		Development		Construction		Mortgage		Multifamily		Occupied		Occupied		and Other		Unallocated		Total
Three Months Ended September 30, 2022
Three Months Ended March 31, 2022
Allowance for Loan Losses:
Beginning Balance	$	6,275	$	2	$	4,772	$	4,206	$	14,977	$	1,920	$	12,235	$	154	$	170	$	44,711	$	6,256	$	13	$	3,139		618	$	3,757	$	12,610	$	1,495	$	11,335	$	147	$	650	$	40,020
Provision for Loan Losses		70		(1)		(303)		(257)		1,845		107		47		13		(21)		1,500		(620)		(7)		568		(6)		125		1,473		100		328		38		(324)		1,675
Loans Charged-off		—		—		—		—		—		—		—		(5)		—		(5)		—		—		—		—		—		—		—		—		(15)		—		(15)
Recoveries of Loans		3		—		—		281		—		—		—		1		—		285		2		—		—		—		3		—		—		—		7		—		12
Total Ending Allowance Balance	$	6,348	$	1	$	4,469	$	4,230	$	16,822	$	2,027	$	12,282	$	163	$	149	$	46,491	$	5,638	$	6	$	3,707	$	612	$	3,885	$	14,083	$	1,595	$	11,663	$	177	$	326	$	41,692

Three Months Ended September 30, 2021
Allowance for Loan Losses:
Beginning Balance	$	6,525	$	50	$	3,427	$	3,502	$	11,150	$	1,244	$	11,018	$	220	$	455	$	37,591
Provision for Loan Losses		171		(23)		47		33		816		179		3		(37)		111		1,300
Loans Charged-off		(6)		—		—		—		—		—		—		(14)		—		(20)
Recoveries of Loans		12		—		—		18		—		—		—		—		—		30
Total Ending Allowance Balance	$	6,702	$	27	$	3,474	$	3,553	$	11,966	$	1,423	$	11,021	$	169	$	566	$	38,901

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~~The following table presents the activity in the allowance for loan losses, by segment, for the nine months ended September 30, 2022 and 2021:~~

Paycheck

Construction

CRE

CRE

Protection

and Land

1--4 Family

Owner

Non-owner

Consumer

(dollars in thousands)

Commercial

Program

Development

Mortgage

Multifamily

Occupied

Occupied

and Other

Unallocated

Total
Nine Months Ended September 30, 2022

Allowance for Loan Losses:

Beginning Balance

$
6,256

$
13

$
3,757

$
3,757

$
12,610

$
1,495

$
11,335

$
147

$
650

$
40,020
Provision for Loan Losses

98

(12)

712

187

4,212

532

947

25

(501)

6,200
Loans Charged-off

(13)

—

—

—

—

—

—

(21)

—

(34)
Recoveries of Loans

7

—

—

286

—

—

—

12

—

305
Total Ending Allowance Balance

$
6,348

$
1

$
4,469

$
4,230

$
16,822

$
2,027

$
12,282

$
163

$
149

$
46,491

Nine Months Ended September 30, 2021

Allowance for Loan Losses:

Beginning Balance

$
5,703

$
70

$
2,491

$
3,972

$
9,517

$
1,162

$
10,991

$
203

$
732

$
34,841
Provision for Loan Losses

971

(43)

983

(437)

2,449

229

30

(16)

(166)

4,000
Loans Charged-off

(6)

—

—

(5)

—

—

—

(26)

—

(37)
Recoveries of Loans

34

—

—

23

—

32

—

8

—

97
Total Ending Allowance Balance

$
6,702

$
27

$
3,474

$
3,553

$
11,966

$
1,423

$
11,021

$
169

$
566

$
38,901

The following tables present the balance in the allowance for ~~loan~~credit losses and the recorded investment in loans, by segment, based on impairment method as of ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021:~~2022:


			Paycheck		Construction						CRE		CRE										Paycheck		Construction								CRE		CRE
			Protection		and Land		1--4 Family				Owner		Non-owner		Consumer								Protection		and Land		1-4 Family		1--4 Family				Owner		Non-owner		Consumer
(dollars in thousands)	Commercial		Program		Development		Mortgage		Multifamily		Occupied		Occupied		and Other		Unallocated		Total		Commercial		Program		Development		Construction		Mortgage		Multifamily		Occupied		Occupied		and Other		Unallocated		Total
Allowance for Loan Losses at September 30, 2022
ACL at March 31, 2023
Individually Evaluated for Impairment	$	12	$	—	$	—	$	—	$	—	$	—	$	222	$	—	$	—	$	234	$	76	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	76
Collectively Evaluated for Impairment		6,336		1		4,469		4,230		16,822		2,027		12,060		163		149		46,257		5,490		—		3,169		806		2,717		20,989		1,083		15,744		74		—		50,072
Totals	$	6,348	$	1	$	4,469	$	4,230	$	16,822	$	2,027	$	12,282	$	163	$	149	$	46,491	$	5,566	$	—	$	3,169	$	806	$	2,717	$	20,989	$	1,083	$	15,744	$	74	$	—	$	50,148

Allowance for Loan Losses at December 31, 2021
ALL at December 31, 2022
Individually Evaluated for Impairment	$	607	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	607	$	71	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	71
Collectively Evaluated for Impairment		5,649		13		3,757		3,757		12,610		1,495		11,335		147		650		39,413		6,429		1		3,911		845		4,325		17,459		1,965		12,576		151		263		47,925
Totals	$	6,256	$	13	$	3,757	$	3,757	$	12,610	$	1,495	$	11,335	$	147	$	650	$	40,020	$	6,500	$	1	$	3,911	$	845	$	4,325	$	17,459	$	1,965	$	12,576	$	151	$	263	$	47,996


			Paycheck		Construction						CRE		CRE								Paycheck		Construction								CRE		CRE
			Protection		and Land		1--4 Family				Owner		Non-owner		Consumer						Protection		and Land		1-4 Family		1--4 Family				Owner		Non-owner		Consumer
(dollars in thousands)	Commercial		Program		Development		Mortgage		Multifamily		Occupied		Occupied		and Other		Total		Commercial		Program		Development		Construction		Mortgage		Multifamily		Occupied		Occupied		and Other		Total
Loans at September 30, 2022
Loans at March 31, 2023
Individually Evaluated for Impairment	$	10,273	$	—	$	110	$	280	$	—	$	1,667	$	18,437	$	—	$	30,767	$	18,461	$	—	$	100	$	—	$	272	$	—	$	1,604	$	15,821	$	—	$	36,258
Collectively Evaluated for Impairment		402,175		1,192		335,447		340,822		1,230,509		149,421		882,254		7,495		3,349,315		435,732		963		312,177		85,797		379,938		1,320,081		157,046		946,850		9,518		3,648,102
Totals	$	412,448	$	1,192	$	335,557	$	341,102	$	1,230,509	$	151,088	$	900,691	$	7,495	$	3,380,082	$	454,193	$	963	$	312,277	$	85,797	$	380,210	$	1,320,081	$	158,650	$	962,671	$	9,518	$	3,684,360

Loans at December 31, 2021
Loans at December 31, 2022
Individually Evaluated for Impairment	$	14,512	$	—	$	130	$	1,390	$	—	$	2,421	$	4,188	$	—	$	22,641	$	19,675	$	—	$	106	$	—	$	392	$	—	$	1,637	$	6,239	$	—	$	28,049
Collectively Evaluated for Impairment		345,657		26,162		281,344		303,927		910,243		108,675		814,381		6,442		2,796,831		415,669		1,049		295,448		70,242		355,082		1,306,738		148,268		940,769		8,132		3,541,397
Totals	$	360,169	$	26,162	$	281,474	$	305,317	$	910,243	$	111,096	$	818,569	$	6,442	$	2,819,472	$	435,344	$	1,049	$	295,554	$	70,242	$	355,474	$	1,306,738	$	149,905	$	947,008	$	8,132	$	3,569,446

The following table presents the amortized cost basis of collateral dependent loans by the primary collateral type, which are individually evaluated to determine expected credit losses, and the related ACL allocated to these loans as of March 31, 2023:


	Primary Type of Collateral
			Business						ACL
(dollars in thousands)	Real Estate		Assets		Other		Total		Allocation
March 31, 2023
Commercial	$	—	$	8,080	$	10,381	$	18,461	$	76
Paycheck Protection Program		—		—		—		—		—
Construction and Land Development		100		—		—		100		—
1-4 Family Construction		—		—		—		—		—
Real Estate Mortgage:
1-4 Family Mortgage		272		—		—		272		—
Multifamily		—		—		—		—		—
CRE Owner Occupied		1,604		—		—		1,604		—
CRE Nonowner Occupied		15,821		—		—		15,821		—
Consumer and Other		—		—		—		—		—
Totals	$	17,797	$	8,080	$	10,381	$	36,258	$	76

Accrued interest receivable on loans, which is recorded within accrued interest on the balance sheet, totaled $9.5 million at March 31, 2023 and is excluded from the estimate of credit losses.

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Effective January 1, 2023, the Company adopted the provision of ASU 2022-02, which eliminated the accounting for troubled debt restructurings, or TDRs, while expanding loan modification and vintage disclosure requirements. For the three months ended March 31, 2023, the Company modified one CRE nonowner occupied loan, with an outstanding balance of $9.8 million, for a borrower experiencing financial difficulty by granting a 12-month extension at a below market rate. There was no forgiveness of principal and this loan was current with its modified terms as of March 31, 2023.

Prior to the adoption of ASU 2022-02, at December 31, 2022, there were two loans classified as TDRs with total aggregate outstanding balances of $188,000.

Pre-ASC 326 Adoption Impaired Loan Disclosures

The following table presents information regarding total carrying amounts and total unpaid principal balances of impaired loans by loan segment as of ~~September 30, 2022 and~~ December 31, ~~2021:~~2022:

											��
	September 30, 2022						December 31, 2021						December 31, 2022
	Recorded		Principal		Related		Recorded		Principal		Related		Recorded		Principal		Related
(dollars in thousands)	Investment		Balance		Allowance		Investment		Balance		Allowance		Investment		Balance		Allowance
Loans With No Related Allowance for Loan Losses:
Commercial	$	10,190	$	10,190	$	—	$	4,545	$	4,545	$	—	$	19,508	$	19,508	$	—
Construction and Land Development		110		717		—		130		737		—		106		713		—
Real Estate Mortgage:
HELOC and 1-4 Family Junior Mortgage		—		—		—		933		933		—
1st REM - Rentals		280		280		—		457		457		—
1-4 Family Mortgage														392		392		—
CRE Owner Occupied		1,667		1,744		—		2,421		2,466		—		1,637		1,726		—
CRE Nonowner Occupied		6,302		6,302		—		4,188		4,188		—		6,239		6,239		—
Totals		18,549		19,233		—		12,674		13,326		—		27,882		28,578		—

Loans With An Allowance for Loan Losses:
Commercial		83		83		12		9,967		9,967		607		167		167		71
Real Estate Mortgage:
CRE Nonowner Occupied		12,135		12,135		222		—		—		—
Totals		12,218		12,218		234		9,967		9,967		607		167		167		71
Grand Totals	$	30,767	$	31,451	$	234	$	22,641	$	23,293	$	607	$	28,049	$	28,745	$	71

The following table presents information regarding the average balances and interest income recognized on impaired loans by loan segment for the three ~~and nine~~ months ended ~~September 30, 2022 and 2021:~~March 31, 2022:



	Three Months Ended September 30,								Nine Months Ended September 30,								Three Months Ended
	2022				2021				2022				2021				March 31, 2022
	Average		Interest		Average		Interest		Average		Interest		Average		Interest		Average		Interest
(dollars in thousands)	Investment		Recognized		Investment		Recognized		Investment		Recognized		Investment		Recognized		Investment		Recognized
Loans With No Related Allowance for Loan Losses:
Commercial	$	9,929	$	187	$	50	$	1	$	11,343	$	519	$	50	$	3	$	14,053	$	190
Construction and Land Development		114		—		137		—		120		—		144		—		127		—
Real Estate Mortgage:
HELOC and 1-4 Family Junior Mortgage		—		—		884		12		—		—		884		34
1st REM - Rentals		282		4		465		6		286		11		470		18
1-4 Family Mortgage																		290		4
CRE Owner Occupied		1,751		17		867		3		1,762		49		868		9		2,463		26
CRE Nonowner Occupied		6,333		85		4,232		54		6,431		249		4,262		161		3,004		37
Totals		18,409		293		6,635		76		19,942		828		6,678		225		19,937		257

Loans With An Allowance for Loan Losses:
Commercial		84		—		1,154		14		86		1		1,155		40		100		—
Real Estate Mortgage:
CRE Nonowner Occupied		12,135		127		—		—		12,135		370		—		—
Totals		12,219		127		1,154		14		12,221		371		1,155		40		100		—
Grand Totals	$	30,628	$	420	$	7,789	$	90	$	32,163	$	1,199	$	7,833	$	265	$	20,037	$	257

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors. The process of analyzing loans for

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~~changes in risk rating is ongoing through routine monitoring of the portfolio and annual internal credit reviews for credits meeting certain thresholds.~~

~~The following tables present the risk category of loans by loan segment as of September 30, 2022 and December 31, 2021, based on the most recent analysis performed by management:~~

September 30, 2022
(dollars in thousands)

Pass

Watch

Substandard

Total
Commercial

$
396,736

$
5,439

$
10,273

$
412,448
Paycheck Protection Program

1,192

—

—

1,192
Construction and Land Development

335,447

—

110

335,557
Real Estate Mortgage:

HELOC and 1-4 Family Junior Mortgage

29,981

—

—

29,981
1st REM - 1-4 Family

51,246

678

—

51,924
LOCs and 2nd REM - Rentals

25,164

10

—

25,174
1st REM - Rentals

233,743

—

280

234,023
Multifamily

1,230,509

—

—

1,230,509
CRE Owner Occupied

149,421

—

1,667

151,088
CRE Nonowner Occupied

865,622

16,632

18,437

900,691
Consumer and Other

7,495

—

—

7,495
Totals

$
3,326,556

$
22,759

$
30,767

$
3,380,082

December 31, 2021
(dollars in thousands)

Pass

Watch

Substandard

Total
Commercial

$
336,939

$
8,718

$
14,512

$
360,169
Paycheck Protection Program

26,162

—

—

26,162
Construction and Land Development

281,344

—

130

281,474
Real Estate Mortgage:

HELOC and 1-4 Family Junior Mortgage

30,327

—

933

31,260
1st REM - 1-4 Family

48,024

689

—

48,713
LOCs and 2nd REM - Rentals

21,625

16

—

21,641
1st REM - Rentals

203,246

—

457

203,703
Multifamily

910,243

—

—

910,243
CRE Owner Occupied

108,675

—

2,421

111,096
CRE Nonowner Occupied

774,474

39,907

4,188

818,569
Consumer and Other

6,442

—

—

6,442
Totals

$
2,747,501

$
49,330

$
22,641

$
2,819,472

~~Table of Contents~~

~~The following tables present the aging of the recorded investment in past due loans by loan segment as of September 30, 2022 and December 31, 2021:~~

Accruing Interest

30-89 Days

90 Days or

(dollars in thousands)

Current

Past Due

More Past Due

Nonaccrual

Total
September 30, 2022

Commercial

$
412,448

$
—

$
—

$
—

$
412,448
Paycheck Protection Program

1,155

37

—

—

1,192
Construction and Land Development

335,447

—

—

110

335,557
Real Estate Mortgage:

HELOC and 1-4 Family Junior Mortgage

29,981

—

—

—

29,981
1st REM - 1-4 Family

51,924

—

—

—

51,924
LOCs and 2nd REM - Rentals

25,174

—

—

—

25,174
1st REM - Rentals

234,023

—

—

—

234,023
Multifamily

1,230,509

—

—

—

1,230,509
CRE Owner Occupied

150,535

—

—

553

151,088
CRE Nonowner Occupied

900,691

—

—

—

900,691
Consumer and Other

7,494

1

—

—

7,495
Totals

$
3,379,381

$
38

$
—

$
663

$
3,380,082

Accruing Interest

30-89 Days

90 Days or

(dollars in thousands)

Current

Past Due

More Past Due

Nonaccrual

Total
December 31, 2021

Commercial

$
360,169

$
—

$
—

$
—

$
360,169
Paycheck Protection Program

26,162

—

—

—

26,162
Construction and Land Development

281,344

—

—

130

281,474
Real Estate Mortgage:

HELOC and 1-4 Family Junior Mortgage

31,211

49

—

—

31,260
1st REM - 1-4 Family

48,713

—

—

—

48,713
LOCs and 2nd REM - Rentals

21,641

—

—

—

21,641
1st REM - Rentals

203,703

—

—

—

203,703
Multifamily

910,243

—

—

—

910,243
CRE Owner Occupied

110,504

—

—

592

111,096
CRE Nonowner Occupied

818,569

—

—

—

818,569
Consumer and Other

6,442

—

—

—

6,442
Totals

$
2,818,701

$
49

$
—

$
722

$
2,819,472

At September 30, 2022, there were two loans classified as troubled debt restructurings with total aggregate outstanding balances of $193,000. In comparison, at December 31, 2021, there were four loans classified as troubled debt restructurings with total aggregate outstanding balances of $1.4 million. There were no new loans classified as troubled debt restructurings during the nine month period ended September 30, 2022 and no loans classified as troubled debt restructurings during the previous twelve months subsequently defaulted during the nine months ended September 30, 2022.

In response to the COVID-19 pandemic, the Company developed programs for clients who experienced business and personal disruptions due to the COVID-19 pandemic pursuant to which the Company provided interest-only modifications, loan payment deferrals, or extended amortization modifications. In accordance with interagency regulatory guidance and the CARES Act, qualifying loans modified in response to the COVID-19 pandemic, made before January 1, 2022, are not considered troubled debt restructurings.

~~Table of Contents~~

~~The following table presents a summary of active loan modifications made in response to the COVID-19 pandemic, by loan segment and modification type, as of September 30, 2022:~~

Interest-Only

Extended Amortization

Total
(dollars in thousands)

Amount

# of Loans

Amount

# of Loans

Amount

# of Loans
Real Estate Mortgage:

CRE Nonowner Occupied

$
10,623

1

$
—

—

$
10,623

1
Totals

$
10,623

1

$
—

—

$
10,623

1

Note 5: Deposits

The following table presents the composition of deposits at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021:~~2022:


	September 30,		December 31,		March 31,		December 31,
(dollars in thousands)	2022		2021		2023		2022
Transaction Deposits	$	1,471,480	$	1,419,873	$	1,372,235	$	1,336,264
Savings and Money Market Deposits		1,077,333		863,567		913,013		1,031,873
Time Deposits		293,052		293,474		266,213		272,253
Brokered Deposits		463,209		369,323		859,662		776,153
Totals	$	3,305,074	$	2,946,237	$	3,411,123	$	3,416,543

Brokered deposits contain brokered transaction and money market accounts of ~~$195.7~~$175.4 million and ~~$131.2~~$184.3 million as of ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, respectively.

The following table presents the scheduled maturities of brokered and customer time deposits at ~~September 30, 2022:~~March 31, 2023:


	September 30,		March 31,
(dollars in thousands)	2022		2023
Less than 1 Year	$	222,981	$	340,742
1 to 2 Years		103,232		112,541
2 to 3 Years		114,268		371,335
3 to 4 Years		74,726		65,976
4 to 5 Years		28,391		59,100
Greater than 5 Years		17,000		758
Totals	$	560,598	$	950,452

The aggregate amount of time deposits greater than $250,000 was approximately ~~$100.0~~$81.8 million and ~~$59.6~~$92.3 million at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, respectively.

Note 6: Derivative Instruments and Hedging Activities

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

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financial institutions in order to minimize the risk to the Company. These swaps are derivatives, but are not designated as hedging instruments.

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

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The following table presents a summary of the Company’s interest rate swaps to facilitate customer transactions as of ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021:~~2022:


	September 30, 2022				December 31, 2021				March 31, 2023				December 31, 2022
	Notional		Estimated		Notional		Estimated		Notional		Estimated		Notional		Estimated
(dollars in thousands)	Amount		Fair Value		Amount		Fair Value		Amount		Fair Value		Amount		Fair Value
Interest rate swap agreements:
Assets	$	65,618	$	8,492	$	49,101	$	641	$	65,004	$	6,704	$	65,315	$	8,240
Liabilities		65,618		(8,492)		49,101		(641)		65,004		(6,704)		65,315		(8,240)
Total	$	131,236	$	—	$	98,202	$	—	$	130,008	$	—	$	130,630	$	—

Cash Flow Hedging Derivatives

For derivative instruments that are designated and qualify as a cash flow hedge, the aggregate fair value of the derivative instrument is recorded in other assets or other liabilities with any gain or loss related to changes in fair value recorded in accumulated other comprehensive income, net of tax. The gain or loss is reclassified into earnings in the same period during which the hedged asset or liability affects earnings and is presented in the same income statement line item as the earnings effect of the hedged asset or liability. The Company utilizes cash flow hedges to manage interest rate exposure for the brokered deposit and wholesale borrowing portfolios. During the next 12 months, the Company estimates that ~~$3.4~~$5.5 million will be reclassified to interest expense, as a reduction of the expense.

The following table presents a summary of the Company’s interest rate swaps designated as cash flow hedges as of ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021:~~2022:


(dollars in thousands)	September 30, 2022			December 31, 2021			March 31, 2023			December 31, 2022
Notional Amount	$	125,000		$	125,000		$	183,000		$	163,000
Weighted Average Pay Rate		1.23	%		1.27	%		2.00	%		1.90	%
Weighted Average Receive Rate		2.24	%		0.14	%		4.66	%		3.47	%
Weighted Average Maturity (Years)		3.02			3.76			4.80			5.15
Net Unrealized Gain	$	10,834		$	791		$	6,143		$	9,175

The Company purchases interest rate caps, designated as cash flow hedges, of certain deposit liabilities. The interest rate caps require receipt of variable amounts from the counterparties when interest rates rise above the strike price in the contracts. For the ~~nine~~three months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021,~~ the company recognized amortization expense on the interest rate caps of ~~$574,000~~$198,000 and ~~$212,000,~~$176,000, respectively, which was recorded as a component of interest expense on brokered deposits and FHLB advances.

The following table presents a summary of the Company’s interest rate caps designated as cash flow hedges as of ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021:~~2022:


(dollars in thousands)	September 30, 2022			December 31, 2021			March 31, 2023			December 31, 2022
Notional Amount	$	125,000		$	110,000		$	125,000		$	125,000
Unamortized Premium Paid		6,070			5,859			5,674			5,872
Weighted Average Strike Rate		0.96	%		0.90	%		0.96	%		0.96	%
Weighted Average Maturity (Years)		7.60			8.72			7.10			7.35

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The following table presents a summary of the Company’s interest rate contracts as of ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021:~~2022:


	September 30, 2022				December 31, 2021				March 31, 2023				December 31, 2022
	Notional		Estimated		Notional		Estimated		Notional		Estimated		Notional		Estimated
(dollars in thousands)	Amount		Fair Value		Amount		Fair Value		Amount		Fair Value		Amount		Fair Value
Interest rate swap agreements:
Assets	$	125,000	$	10,834	$	90,000	$	1,717	$	125,000	$	8,868	$	125,000	$	10,477
Liabilities		—		—		35,000		(926)		58,000		(2,725)		38,000		(1,302)
Interest rate cap agreements:
Assets		125,000		19,203		110,000		7,356		125,000		17,004		125,000		19,406

The Company is party to collateral support agreements with certain derivative counterparties. These agreements require that the Company maintain collateral based on the fair values of derivative transactions. In the event of default by the Company, the counterparty would be entitled to the collateral. As of ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, the Company pledged no cash collateral for the Company’s derivative ~~contracts of $0 and $370,000, respectively.~~contracts. In addition, as of ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, the Company's counterparties pledged cash collateral to the Company of ~~$38.2~~$31.3 million and ~~$8.6~~$36.4 million, respectively.

The following table summarizes gross and net information about derivative instruments that are eligible for offset in the balance sheet at March 31, 2023 and December 31, 2022:


							Gross Amounts Not Offset in the Balance Sheet
					Net Amounts of
	Gross Amounts		Gross Amounts		Assets (Liabilities)
	of Recognized		Offset in the		Presented in the		Financial		Cash Collateral		Net Assets
(dollars in thousands)	Assets (Liabilities)		Balance Sheet		Balance Sheet		Instruments		Received (Paid)		(Liabilities)
As of March 31, 2023
Assets	$	32,576	$	—	$	32,576	$	—	$	31,303	$	1,273
Liabilities		(9,429)		—		(9,429)		—		—		(9,429)

As of December 31, 2022
Assets	$	38,123	$	—	$	38,123	$	—	$	36,353	$	1,770
Liabilities		(9,542)		—		(9,542)		—		—		(9,542)

The following table presents the effect of derivative instruments in cash flow hedging relationships on the consolidated statements of income for the three ~~and nine~~ months ended ~~September 30, 2022~~March 31, 2023 and ~~2021:~~2022:

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

(dollars in thousands)

2022

2021

2022

2021

(dollars in thousands)

2023

2022

Derivatives in

Location of Gain (Loss)

Gain (Loss)

Loss

Location of Gain (Loss)

Gain (Loss)

Cash Flow Hedging

Reclassified

Reclassified from

Reclassified

Reclassified from

Relationships

from AOCI into Income

AOCI into Earnings

from AOCI into Income

AOCI into Earnings

Interest rate swaps

Interest expense

288

(290)

(24)

(827)

Interest expense

1,177

(247)

Interest rate caps

Interest expense

(169)

(116)

(539)

(252)

Interest expense

(110)

(176)

No amounts were reclassified from accumulated other comprehensive income into net income related to hedge ineffectiveness for these derivatives during the three ~~and nine~~ months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021,~~ and no amounts are expected to be reclassified from accumulated other comprehensive income into net income related to hedge ineffectiveness over the next twelve months.

Note 7: Federal Home Loan Bank Advances and Other Borrowings

Federal Home Loan Bank Advances. The Company has entered into an Advances, Pledge, and Security Agreement with the FHLB whereby specific mortgage loans of the Bank with principal balances of $~~1.14~~1.35 billion and $930.9 million at September 30, 2022 and December 31, 2021, respectively, were pledged to the FHLB as collateral. FHLB advances are also secured with FHLB stock owned by the Company. Total remaining available capacity under the agreement was $426.6 million and $550.8 million at September 30, 2022 and December 31, 2021, respectively.

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$1.20 billion at March 31, 2023 and December 31, 2022, respectively, were pledged to the FHLB as collateral. FHLB advances are also secured with FHLB stock owned by the Company. Total remaining available capacity under the agreement was $246.8 million and $390.9 million at March 31, 2023 and December 31, 2022, respectively.

The following table presents FHLB advances, by maturity, at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021:~~2022:


	September 30, 2022				December 31, 2021				March 31, 2023				December 31, 2022
	Weighted				Weighted				Weighted				Weighted
	Average		Total		Average		Total		Average		Total		Average		Total
(dollars in thousands)	Rate		Outstanding		Rate		Outstanding		Rate		Outstanding		Rate		Outstanding
Less than 1 Year	2.83	%	$	55,000	—	%	$	—	4.77	%	$	115,500	4.30	%	$	83,000
1 to 2 Years	1.29			7,500	—			—	4.41			35,000	1.05			5,000
2 to 3 Years	1.22			5,000	1.66			22,500	4.32			22,500	1.22			5,000
3 to 4 Years	—			—	1.22			16,000	3.29			14,000	0.78			4,000
4 to 5 Years	0.78			4,000	0.78			4,000	4.18			10,000	—			—
Totals			$	71,500			$	42,500			$	197,000			$	97,000

Line of Credit. In 2021, the Company entered into a Loan and Security Agreement and related revolving note with an unaffiliated financial institution that was secured by 100% of the issued and outstanding stock of the Bank. The note contains customary representations, warranties, and covenants, including certain financial covenants and capital ratio requirements. As of ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, the Company believes it was in compliance with all covenants.

On September 1, 2022, the Company entered into a second amendment to the agreement which increased the maximum principal amount of the Company’s revolving line of credit from $25.0 million to $40.0 million and extended the maturity date from February 28, 2023 to September 1, 2024. As of ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, there were no$13.8 million outstanding balances under the revolving line of credit.

Note 8: Subordinated Debentures

The following table presents a summary of the Company’s subordinated debentures as of ~~September 30, 2022:~~March 31, 2023:


					Total Debt		Total Debt								Total Debt		Total Debt
	Date	First	Maturity		Outstanding		Outstanding	Interest			Date	First	Maturity		Outstanding		Outstanding	Interest
Name	Established	Redemption Date	Date		September 30, 2022		December 31, 2021	Rate		Coupon Structure	Established	Redemption Date	Date		March 31, 2023		December 31, 2022	Rate		Coupon Structure
(dollars in thousands)
2027 Notes	July 12, 2017	July 15, 2022	July 15, 2027	$	13,750	$	13,750	6.62	%	Fixed-to-Floating⁽¹⁾
2030 Notes	June 19, 2020	July 1, 2025	July 1, 2030		50,000		50,000	5.25	%	Fixed-to-Floating⁽²⁾	June 19, 2020	July 1, 2025	July 1, 2030	$	50,000	$	50,000	5.25	%	Fixed-to-Floating⁽¹⁾
2031 Notes	July 8, 2021	July 15, 2026	July 15, 2031		30,000		30,000	3.25	%	Fixed-to-Floating⁽³⁾	July 8, 2021	July 15, 2026	July 15, 2031		30,000		30,000	3.25	%	Fixed-to-Floating⁽²⁾
Subordinated Debentures					93,750		93,750								80,000		80,000
Debt Issuance Costs					(1,191)		(1,511)								(999)		(1,095)
Subordinated Debentures, Net of Issuance Costs				$	92,559	$	92,239							$	79,001	$	78,905

(1)	~~Three month LIBOR (as determined on July 15, 2022) + 3.88% beginning July 15, 2022 until either the early redemption date or the maturity date.~~

~~(2)~~

Migrates to three month term SOFR + 5.13% beginning July 1, 2025 until either the early redemption date or the maturity date.

~~(3)~~(2)

Migrates to three month term SOFR + 2.52% beginning July 15, 2026 until either the early redemption date or the maturity date.

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Note 9: Commitments, Contingencies and Credit Risk

Financial Instruments with Off-Balance Sheet Credit Risk

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

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

The following commitments were outstanding at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021:~~2022:


	September 30,		December 31,		March 31,		December 31,
(dollars in thousands)	2022		2021		2023		2022
Unfunded Commitments Under Lines of Credit	$	837,708	$	799,148	$	709,213	$	848,734
Letters of Credit		122,438		119,647		123,025		115,769
Totals	$	960,146	$	918,795	$	832,238	$	964,503

The Company had outstanding letters of credit with the FHLB in total amounts of ~~$95.7~~$62.9 million and ~~$36.5~~$78.4 million at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, respectively, on behalf of customers and to secure public deposits.

The ACL for off-balance sheet credit exposures was $4.3 million at March 31, 2023 and is separately classified on the balance sheet within other liabilities. Prior to the adoption of CECL, the Company’s ACL for off-balance sheet credit exposures was not material. The following table presents the balance and activity in the allowance for credit losses for off-balance sheet credit exposures for the three months ended March 31, 2023:


		Three Months Ended
(dollars in thousands)		March 31, 2023
Allowance for Credit Losses:
Beginning Balance, Prior to Adoption of CECL	$	360
Impact of Adopting CECL		4,850
Provision (Credit) for Off-Balance Sheet Credit Exposures		(875)
Total Ending Balance	$	4,335

Legal Contingencies

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

Note 10: Stock Options and Restricted Stock

In 2012, the Company adopted the Bridgewater Bancshares, Inc. 2012 Combined Incentive and Non-Statutory Stock Option Plan (the “2012 Plan”) under which the Company was able to grant options to its directors, officers, and employees for up to 750,000 shares of common stock. Both incentive stock options and nonqualified stock options were

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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. The 2012 Plan expired in March 2022, and awards are no longer able to be granted under the 2012 Plan.

In 2017, the Company adopted the Bridgewater Bancshares, Inc. 2017 Combined Incentive and Non-Statutory Stock Option Plan (the “2017 Plan”). Under the 2017 Plan, the Company may grant options to its directors, officers, employees and consultants for up to 1,500,000 shares of common stock. Both incentive stock options and nonqualified stock options may be granted under the 2017 Plan. The exercise price of each option equals the fair market value of the Company’s stock on the date of grant and the maximum term of each outstanding option is ten years. All outstanding options have been granted with vesting periods of four or five years. As of ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, there were ~~44,700~~46,700 and ~~294,700~~44,700 shares, respectively, of the Company’s common stock reserved for future option grants under the 2017 Plan.

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In 2019, the Company adopted the Bridgewater Bancshares, Inc. 2019 Equity Incentive Plan (the “2019 EIP”). Under the 2019 EIP, the Company may grant incentive and nonqualified stock options, stock appreciation rights, stock awards, restricted stock units, restricted stock and cash incentive awards. The Company may grant these awards to its directors, officers, employees and certain other service providers for up to 1,000,000 shares of common stock. The exercise price of each option equals the fair market value of the Company’s stock on the date of grant and the maximum term of each award is ten years. All outstanding awards have been granted with a vesting period of four years. As of ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, there were ~~346,247~~137,786 and ~~352,575~~231,363 shares, respectively, 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 grant. Historically, the Company has not paid a dividend on its common stock and does not expect to do so in the near future.

The Company used the S&P 600 CM Bank Index as its historical volatility index. The S&P 600 CM Bank Index is an index of publicly traded small capitalization, regional, commercial banks located throughout the United States. There were 51 banks in the index ranging in market capitalization from $500 million up to $4.0 billion.

~~The weighted average assumptions used in the model of valuing stock option grants for the nine months ended September 30, 2022, are as follows:~~


	~~September 30,~~
	~~2022~~
~~Dividend Yield~~	—	%
~~Expected Life~~	7	~~Years~~
~~Expected Volatility~~	~~24.71~~	%
~~Risk-Free Interest Rate~~	~~1.70~~	%

model. The following table presents a summary of the status of the Company’s stock option grants for the ~~nine~~three months ended ~~September 30, 2022:~~March 31, 2023:


	September 30, 2022			March 31, 2023
		Weighted			Weighted
		Average			Average
	Shares	Exercise Price		Shares	Exercise Price
Outstanding at Beginning of Year	1,768,745	$	7.67	1,913,444	$	9.35
Granted	290,000		17.50	—		—
Exercised	(28,000)		3.81	(82,000)		3.19
Forfeitures	(12,000)		14.77	(2,000)		7.47
Outstanding at Period End	2,018,745	$	9.10	1,829,444	$	9.63

Options Exercisable at Period End	1,348,470	$	7.06	1,488,819	$	8.26

For the three months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021,~~ the Company recognized compensation expense for stock options of ~~$326,000~~$186,000 and ~~$234,000, respectively. For the nine months ended September 30, 2022 and 2021, the Company recognized compensation expense for stock options of $926,000 and $686,000,~~$288,000, respectively.

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The following table presents information pertaining to options outstanding at ~~September 30, 2022:~~March 31, 2023:


		Options Outstanding				Options Exercisable				Options Outstanding				Options Exercisable
					Weighted Average								Weighted Average
		Number of	Weighted Average		Remaining Contractual	Number of	Weighted Average			Number of	Weighted Average		Remaining Contractual	Number of	Weighted Average
Range of Exercise Prices	Range of Exercise Prices	Options	Exercise Price		Life in Years	Options	Exercise Price		Range of Exercise Prices	Options	Exercise Price		Life in Years	Options	Exercise Price
$	2.13 - 3.99	384,000	$	3.04	1.3	384,000	$	3.04	2.13 - 3.99	228,500	$	3.05	0.8	228,500	$	3.05
	7.00 - 7.99	926,717		7.47	5.0	733,317		7.47	7.00 - 7.99	899,416		7.47	4.5	899,416		7.47
	8.00 - 8.99	20,000		8.76	7.5	7,500		8.76	8.00 - 8.99	17,500		8.76	7.0	5,000		8.76
	10.00 - 10.99	10,000		10.08	7.7	5,000		10.08	10.00 - 10.99	10,000		10.08	7.2	5,000		10.08
	11.00 - 11.99	85,000		11.27	6.6	51,000		11.27	11.00 - 11.99	85,000		11.27	6.1	58,000		11.29
	12.00 - 12.99	267,528		12.90	6.9	145,028		12.90	12.00 - 12.99	263,528		12.90	6.4	197,778		12.90
	13.00 - 13.99	25,000		13.22	5.6	20,000		13.22	13.00 - 13.99	25,000		13.22	5.1	20,000		13.22
	17.00 - 17.99	300,500		17.50	9.3	2,625		17.49	17.00 - 17.99	300,500		17.50	8.8	75,125		17.50
	Totals	2,018,745	$	9.10	5.3	1,348,470	$	7.06	Totals	1,829,444	$	9.63	5.1	1,488,819	$	8.26

As of ~~September 30, 2022,~~March 31, 2023, there was ~~$1.8~~$1.4 million of total unrecognized compensation cost related to nonvested stock options granted under the 2012 Plan, 2017 Plan and 2019 EIP that is expected to be recognized over a weighted-average period of ~~2.8~~2.5 years.

The following table presents an analysis of nonvested options to purchase shares of the Company’s stock issued and outstanding for the ~~nine~~three months ended ~~September 30, 2022:~~March 31, 2023:


		Weighted			Weighted
	Number of	Average Grant		Number of	Average Grant
	Shares	Date Fair Value		Shares	Date Fair Value
Nonvested Options at December 31, 2021	435,900	$	3.43
Nonvested Options at December 31, 2022				421,375	$	4.87
Granted	290,000		5.28	—		—
Vested	(43,625)		3.95	(80,750)		5.05
Forfeited	(12,000)		5.12	—		—
Nonvested Options at September 30, 2022	670,275	$	4.17
Nonvested Options at March 31, 2023				340,625	$	4.83

Restricted Stock Awards

In 2019 and 2020, the Company granted restricted stock awards out of the 2019 EIP. These awards vest in equal annual installments on the first four anniversaries of the date of the grant. Nonvested restricted stock awards are classified as outstanding shares with forfeitable voting and dividend rights.

The following table presents an analysis of nonvested restricted stock awards outstanding for the ~~nine~~three months ended ~~September 30, 2022:~~March 31, 2023:


		Weighted			Weighted
	Number of	Average Grant		Number of	Average Grant
	Shares	Date Fair Value		Shares	Date Fair Value
Nonvested Awards at December 31, 2021	75,113	$	12.59
Nonvested Awards at December 31, 2022				38,762	$	12.50
Granted	—		—	—		—
Vested	(2,786)		10.32	(986)		12.67
Forfeited	(1,000)		12.92	—		—
Nonvested Awards at September 30, 2022	71,327	$	12.68
Nonvested Awards at March 31, 2023				37,776	$	12.49

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Compensation expense associated with the restricted stock awards is recognized on a straight-line basis over the period that the restrictions associated with the awards lapse based on the total cost of the award at the grant date. For the three months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021, the Company recognized compensation expense for restricted stock~~

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~~awards of $113,000 and $115,000, respectively. For the nine months ended September 30, 2022 and 2021,~~ the Company recognized compensation expense for restricted stock awards of ~~$335,000~~$111,000 and ~~$340,000,~~$111,000, respectively.

As of ~~September 30, 2022,~~March 31, 2023, there was ~~$546,000~~$322,000 of total unrecognized compensation cost related to nonvested restricted stock awards granted under the 2019 EIP that is expected to be recognized over a weighted-average period of ~~1.2~~0.7 years.

In addition, during the ~~nine~~three months ended ~~September 30, 2022,~~March 31, 2023, the Company issued ~~14,400~~10,608 shares of unrestricted common stock to non-employee directors, ~~or their designee,~~ as a part of their compensation for their annual services on the Company’s board of directors. The aggregate value of the shares issued to non-employee directors ~~or their designee,~~ of ~~$236,000~~$115,000 was included in stock based compensation expense in the accompanying consolidated statements of shareholders’ equity.

Restricted Stock Units

In 2020, the Company began granting restricted stock units out of the 2019 EIP. Restricted stock units granted out of the 2019 EIP represent the right to receive one share of Company stock upon vesting and vest in equal annual installments on the first four anniversaries of the date of the grant. Nonvested restricted stock units have no voting or dividend rights and are not considered outstanding until vesting.

The following table presents an analysis of nonvested restricted stock units outstanding for the ~~nine~~three months ended ~~September 30, 2022:~~March 31, 2023:


		Weighted			Weighted
	Number of	Average Grant		Number of	Average Grant
	Units	Date Fair Value		Units	Date Fair Value
Nonvested Units at December 31, 2021	344,908	$	15.02
Nonvested Units at December 31, 2022				351,310	$	16.30
Granted	2,500		17.50	82,969		15.59
Vested	(5,100)		15.67	(1,625)		15.77
Forfeited	(9,572)		15.12	—		—
Nonvested Units at September 30, 2022	332,736	$	15.02
Nonvested Units at March 31, 2023				432,654	$	16.17

Compensation expense associated with the restricted stock units is recognized on a straight-line basis over the period that the restrictions associated with the units lapse based on the total cost of the unit at the grant date. For the three months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021,~~ the Company recognized compensation expense for restricted stock units of ~~$358,000~~$529,000 and ~~$179,000, respectively. For the nine months ended September 30, 2022 and 2021, the Company recognized compensation expense for restricted stock units of $1.1 million and $499,000,~~$353,000, respectively.

As of ~~September 30, 2022,~~March 31, 2023, there was ~~$3.9~~$6.3 million of total unrecognized compensation cost related to nonvested restricted stock units granted under the 2019 EIP that is expected to be recognized over a weighted-average period of ~~2.8~~3.0 years.

Note 11: Regulatory Capital

The Company and the Bank are subject to various regulatory requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank must also meet certain specific capital guidelines under the regulatory framework for prompt corrective action. The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

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Quantitative measures established by regulation to ensure capital adequacy require the Company and Bank to maintain minimum amounts and ratios of common equity Tier 1 capital, Tier 1 capital and total capital to risk-weighted assets and of Tier 1 capital to average consolidated assets (referred to as the “leverage ratio”), as defined under the applicable regulatory capital rules.

The following tables present the capital amounts and ratios for the Company, on a consolidated basis, and the Bank as of ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021:~~2022:


					Minimum Required				For Capital Adequacy				To be Well Capitalized								Minimum Required				For Capital Adequacy				To be Well Capitalized
					For Capital Adequacy				Purposes Plus Capital				Under Prompt Corrective								For Capital Adequacy				Purposes Plus Capital				Under Prompt Corrective
	Actual				Purposes				Conservation Buffer				Action Regulations				Actual				Purposes				Conservation Buffer				Action Regulations
(dollars in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio
September 30, 2022
March 31, 2023
Company (Consolidated):
Total Risk-based Capital	$	535,184	13.78	%	$	310,810	8.00	%	$	407,939	10.50	%		N/A	N/A		$	547,764	13.25	%	$	330,826	8.00	%	$	434,210	10.50	%		N/A	N/A
Tier 1 Risk-based Capital		395,765	10.19			233,108	6.00			330,236	8.50			N/A	N/A			417,037	10.08			248,120	6.00			351,503	8.50			N/A	N/A
Common Equity Tier 1 Capital		329,251	8.47			174,831	4.50			271,959	7.00			N/A	N/A			350,523	8.48			186,090	4.50			289,473	7.00			N/A	N/A
Tier 1 Leverage Ratio		395,765	9.98			158,647	4.00			158,647	4.00			N/A	N/A			417,037	9.41			177,320	4.00			177,320	4.00			N/A	N/A
Bank:
Total Risk-based Capital	$	491,982	12.67	%	$	310,689	8.00	%	$	407,779	10.50	%	$	388,361	10.00	%	$	521,610	12.62	%	$	330,694	8.00	%	$	434,036	10.50	%	$	413,368	10.00	%
Tier 1 Risk-based Capital		445,131	11.46			233,017	6.00			330,107	8.50			310,689	8.00			469,904	11.37			248,021	6.00			351,363	8.50			330,694	8.00
Common Equity Tier 1 Capital		445,131	11.46			174,762	4.50			271,853	7.00			252,435	6.50			469,904	11.37			186,015	4.50			289,357	7.00			268,689	6.50
Tier 1 Leverage Ratio		445,131	11.24			158,453	4.00			158,453	4.00			198,067	5.00			469,904	10.61			177,094	4.00			177,094	4.00			221,368	5.00


					Minimum Required				For Capital Adequacy				To be Well Capitalized								Minimum Required				For Capital Adequacy				To be Well Capitalized
					For Capital Adequacy				Purposes Plus Capital				Under Prompt Corrective								For Capital Adequacy				Purposes Plus Capital				Under Prompt Corrective
	Actual				Purposes				Conservation Buffer				Action Regulations				Actual				Purposes				Conservation Buffer				Action Regulations
(dollars in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio
December 31, 2021
December 31, 2022
Company (Consolidated):
Total Risk-based Capital	$	499,554	15.55	%	$	256,966	8.00	%	$	337,268	10.50	%		N/A	N/A		$	536,352	13.15	%	$	326,190	8.00	%	$	428,125	10.50	%		N/A	N/A
Tier 1 Risk-based Capital		367,161	11.43			192,725	6.00			273,027	8.50			N/A	N/A			409,092	10.03			244,643	6.00			346,577	8.50			N/A	N/A
Common Equity Tier 1 Capital		300,647	9.36			144,543	4.50			224,845	7.00			N/A	N/A			342,578	8.40			183,482	4.50			285,417	7.00			N/A	N/A
Tier 1 Leverage Ratio		367,161	10.82			135,723	4.00			135,723	4.00			N/A	N/A			409,092	9.55			171,368	4.00			171,368	4.00			N/A	N/A
Bank:
Total Risk-based Capital	$	415,848	12.94	%	$	257,005	8.00	%	$	337,319	10.50	%	$	321,256	10.00	%	$	508,760	12.47	%	$	326,288	8.00	%	$	428,253	10.50	%	$	407,860	10.00	%
Tier 1 Risk-based Capital		375,688	11.69			192,754	6.00			273,068	8.50			257,005	8.00			460,404	11.29			244,716	6.00			346,681	8.50			326,288	8.00
Common Equity Tier 1 Capital		375,688	11.69			144,565	4.50			224,879	7.00			208,816	6.50			460,404	11.29			183,537	4.50			285,502	7.00			265,109	6.50
Tier 1 Leverage Ratio		375,688	11.09			135,508	4.00			135,508	4.00			169,386	5.00			460,404	10.76			171,113	4.00			171,113	4.00			213,891	5.00

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

Note 12: Fair Value Measurement

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

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

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~~measurement. Assets and liabilities valued at fair value are categorized based on the inputs to the valuation techniques as follows:~~

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

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

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

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

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

Recurring Basis

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The following tables present the balances of the assets and liabilities measured at fair value on a recurring basis as of ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021:~~2022:


	September 30, 2022								March 31, 2023
(dollars in thousands)	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Fair Value of Financial Assets:
Securities Available for Sale:
U.S. Treasury Securities	$	2,338	$	—	$	—	$	2,338	$	2,739	$	—	$	—	$	2,739
Municipal Bonds		—		170,236		—		170,236		—		126,598		—		126,598
Mortgage-Backed Securities		—		191,585		—		191,585		—		227,238		—		227,238
Corporate Securities		—		108,060		—		108,060		—		117,895		—		117,895
SBA Securities		—		22,540		—		22,540		—		30,799		—		30,799
Asset-Backed Securities		—		47,248		—		47,248		—		54,161		—		54,161
Interest Rate Caps		—		19,203		—		19,203		—		17,004		—		17,004
Interest Rate Swaps		—		19,326		—		19,326		—		15,572		—		15,572
Total Fair Value of Financial Assets	$	2,338	$	578,198	$	—	$	580,536	$	2,739	$	589,267	$	—	$	592,006
Fair Value of Financial Liabilities:
Interest Rate Swaps	$	—	$	8,492	$	—	$	8,492	$	—	$	9,429	$	—	$	9,429
Total Fair Value of Financial Liabilities	$	—	$	8,492	$	—	$	8,492	$	—	$	9,429	$	—	$	9,429

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	December 31, 2021								December 31, 2022
(dollars in thousands)	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Fair Value of Financial Assets:
Securities Available for Sale:
U.S. Treasury Securities	$	754	$	—	$	—	$	754	$	2,580	$	—	$	—	$	2,580
Municipal Bonds		—		158,369		—		158,369		—		131,354		—		131,354
Mortgage-Backed Securities		—		124,537		—		124,537		—		237,784		—		237,784
Corporate Securities		—		84,480		—		84,480		—		109,827		—		109,827
SBA Securities		—		30,370		—		30,370		—		20,877		—		20,877
Asset-Backed Securities		—		40,852		—		40,852		—		46,191		—		46,191
Interest Rate Caps		—		7,356		—		7,356		—		19,406		—		19,406
Interest Rate Swaps		—		2,358		—		2,358		—		18,717		—		18,717
Total Fair Value of Financial Assets	$	754	$	448,322	$	—	$	449,076	$	2,580	$	584,156	$	—	$	586,736
Fair Value of Financial Liabilities:
Interest Rate Swaps	$	—	$	1,567	$	—	$	1,567	$	—	$	9,542	$	—	$	9,542
Total Fair Value of Financial Liabilities	$	—	$	1,567	$	—	$	1,567	$	—	$	9,542	$	—	$	9,542

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 Caps

The fair value of the caps is calculated by determining the total expected asset or liability exposure of the derivatives. Total expected exposure incorporates both the current and potential future exposure of the derivative, derived from using observable inputs, such as yield curves and volatilities, and accordingly are valued using Level 2 inputs.

Interest Rate Swaps

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 at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021:~~2022:


	September 30, 2022								March 31, 2023
(dollars in thousands)	Level 1		Level 2		Level 3		Loss		Level 1		Level 2		Level 3		Loss
Impaired Loans	$	—	$	11,984	$	—	$	234
Individually Evaluated Loans									$		$	94	$		$	76
Totals	$	—	$	11,984	$	—	$	234	$	—	$	94	$	—	$	76


	December 31, 2021								December 31, 2022
(dollars in thousands)	Level 1		Level 2		Level 3		Loss		Level 1		Level 2		Level 3		Loss
Impaired Loans	$	—	$	9,360	$	—	$	625	$	—	$	96	$	—	$	71
Totals	$	—	$	9,360	$	—	$	625	$	—	$	96	$	—	$	71

~~Impaired~~Individually Evaluated Loans (Impaired Loans prior to January 1, 2023)

In accordance with the provisions of the individually evaluated loan ~~impairment~~ guidance, ~~impairment~~credit loss is measured on loans when it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement. The Company has elected to use the practical expedient to measure individually evaluated loans as collateral dependent when repayment is expected to be provided substantially through the operation or sale of the collateral. The credit loss is measured as the difference between the amortized cost basis of the loan and the fair value of ~~impaired loans is estimated using one of several methods, including collateral value, market~~the underlying collateral. The fair value of ~~similar debt,~~the collateral is adjusted for the estimated cost to sell if repayment or ~~discounted cash flows.~~satisfaction of a loan is dependent on the sale of the collateral. Those ~~impaired~~individually evaluated 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~~Individually evaluated 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~~Credit loss amounts on ~~impaired~~individually evaluated loans represent specific valuation allowance and write-downs during the period presented ~~on impaired loans~~ that were individually evaluated for impairment based on the estimated fair value of the collateral less estimated selling costs, excluding impaired loans fully charged-off.

Fair Value

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

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

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amounts nor is it recorded as an intangible asset on the balance sheet. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.

The following tables present the carrying amount and estimated fair values of financial instruments at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021:~~2022:


	September 30, 2022										March 31, 2023
			Fair Value Hierarchy										Fair Value Hierarchy
	Carrying								Estimated		Carrying								Estimated
(dollars in thousands)	Amount		Level 1		Level 2		Level 3		Fair Value		Amount		Level 1		Level 2		Level 3		Fair Value
Financial Assets:
Cash and Due From Banks	$	75,496	$	75,496	$	—	$	—	$	75,496	$	209,192	$	209,192	$	—	$	—	$	209,192
Bank-Owned Certificates of Deposit		1,182		—		1,168		—		1,168		1,225		—		1,230		—		1,230
Securities Available for Sale		542,007		2,338		539,669		—		542,007		559,430		2,739		556,691		—		559,430
FHLB Stock, at Cost		15,603		—		15,603		—		15,603		28,632		—		28,632		—		28,632
Loans, Net		3,324,503		—		3,199,676		—		3,199,676		3,625,477		—		3,502,472		—		3,502,472
Accrued Interest Receivable		11,198		—		11,198		—		11,198		13,377		—		13,377		—		13,377
Interest Rate Caps		19,203		—		19,203		—		19,203		17,004		—		17,004		—		17,004
Interest Rate Swaps		19,326		—		19,326		—		19,326		15,572		—		15,572		—		15,572

Financial Liabilities:
Deposits	$	3,305,073	$	—	$	3,275,575	$	—	$	3,275,575	$	3,411,123	$	—	$	3,394,288	$	—	$	3,394,288
Federal Funds Purchased		212,000		—		212,000		—		212,000		437,000		—		437,000		—		437,000
Notes Payable												13,750		—		13,928		—		13,928
FHLB Advances		71,500		—		70,336		—		70,336		197,000		—		198,074		—		198,074
Subordinated Debentures		92,559		—		89,674		—		89,674		79,001		—		73,429		—		73,429
Accrued Interest Payable		2,214		—		2,214		—		2,214		3,257		—		3,257		—		3,257
Interest Rate Swaps		8,492		—		8,492		—		8,492		9,429		—		9,429		—		9,429


	December 31, 2021										December 31, 2022
			Fair Value Hierarchy										Fair Value Hierarchy
	Carrying								Estimated		Carrying								Estimated
(dollars in thousands)	Amount		Level 1		Level 2		Level 3		Fair Value		Amount		Level 1		Level 2		Level 3		Fair Value
Financial Assets:
Cash and Due From Banks	$	143,473	$	143,473	$	—	$	—	$	143,473	$	87,043	$	87,043	$	—	$	—	$	87,043
Bank-Owned Certificates of Deposit		1,876		—		1,884		—		1,884		1,181		—		1,173		—		1,173
Securities Available for Sale		439,362		754		438,608		—		439,362		548,613		2,580		546,033		—		548,613
FHLB Stock, at Cost		5,242		—		5,242		—		5,242		19,606		—		19,606		—		19,606
Loans, Net		2,769,917		—		2,726,417		—		2,726,417		3,512,157		—		3,314,190		—		3,314,190
Accrued Interest Receivable		9,186		—		9,186		—		9,186		13,479		—		13,479		—		13,479
Interest Rate Caps		7,356		—		7,356		—		7,356		19,406		—		19,406		—		19,406
Interest Rate Swaps		2,358		—		2,358		—		2,358		18,717		—		18,717		—		18,717

Financial Liabilities:
Deposits	$	2,946,237	$	—	$	2,931,215	$	—	$	2,931,215	$	3,416,543	$	—	$	3,390,416	$	—	$	3,390,416
Federal Funds Purchased												287,000		—		287,000		—		287,000
Notes Payable												13,750		—		13,473		—		13,473
FHLB Advances		42,500		—		42,515		—		42,515		97,000		—		96,061		—		96,061
Subordinated Debentures		92,239		—		97,700		—		97,700		78,905		—		70,931		—		70,931
Accrued Interest Payable		1,409		—		1,409		—		1,409		2,831		—		2,831		—		2,831
Interest Rate Swaps		1,567		—		1,567		—		1,567		9,542		—		9,542		—		9,542

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

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

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

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

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

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

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

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

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

Subordinated debentures – The fair values of the Company’s 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.

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

Off-balance sheet instruments – Fair values of the Company’s off-balance sheet instruments (lending commitments and unused lines of credit) are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements, the counterparties’ credit standing and discounted cash flow analysis. The fair value of these off-balance sheet items approximates the recorded amounts of the related fees and was not material at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021.~~2022.

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

Note 13: Subsequent Events

On October 15, 2022, the Company elected to redeem the outstanding 2027 Notes in the aggregate principal amount of $13.8 million and made all payments of principal and interest due on the 2027 Notes on October 17, 2022. Concurrently, the Company drew on its revolving line of credit with a correspondent lender in the amount of $13.8 ~~million.~~

~~On October 25, 2022,~~April 26, 2023, the Company’s Board of Directors declared a quarterly cash dividend of $36.72 per share ($0.3672 per depositary share) on its 5.875% Non-Cumulative Perpetual Preferred Stock, Series A (“Series A Preferred

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Stock”), payable on ~~December~~June 1, ~~2022,~~2023, to shareholders of record on the Series A Preferred Stock at the close of business on ~~November~~May 15, ~~2022.~~2023.

On April 25, 2023, the Company’s shareholders approved the Bridgewater Bancshares, Inc. 2023 Equity Incentive Plan (the “2023 Plan”). Under the 2023 Plan, the Company may issue various types of equity awards including, but not limited to, incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock and stock-based awards, as well as cash-based awards to its directors, officers, and employees for up to 1,500,000 shares of common stock. There are currently no awards outstanding under the 2023 Plan.

~~Table~~On April 25, 2023, the Company’s shareholders approved the Third Amendment and Restatement of ~~Contents~~the Company’s Articles of Incorporation and Second Amendment and Restatement of the Company's Bylaws to declassify the Company’s board of directors and increase the maximum number of directors of the Company from eleven (11) to fifteen (15). The Third Amended and Restated Articles of Incorporation became effective on April 26, 2023 upon filing with the Minnesota Secretary of State.

On April 12, 2023, the Company purchased a parcel of land in Lake Elmo, Minnesota, intended for the future development and construction of a branch location. The purchase price for the parcel was $2.6 million.

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

General

The following discussion explains the Company’s financial condition and results of operations as of and for the three ~~and nine~~ months ended ~~September 30, 2022.~~March 31, 2023. Annualized results for this interim period may not be indicative of results for the full year or future periods. The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes presented elsewhere in this report and the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2021,~~2022, filed with the Securities and Exchange Commission, or the SEC, on March ~~8, 2022.~~7, 2023.

Forward-Looking Statements

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

●

interest rate risk, including the effects of recent and anticipated rate increases by the Federal Reserve;

●

fluctuations in the values of the securities held in our securities portfolio, ~~or the values of derivative instruments held in our derivatives portfolio,~~ including as the result of rising interest ~~rates;~~rates, which has resulted in unrealized losses in our securities portfolio;

●

business and economic conditions generally and in the financial services industry, nationally and within our market area, including rising rates of inflation;

●

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

●

loan concentrations in our loan portfolio;

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●

the effects of recent developments and events in the financial services industry, including the large-scale deposit withdrawals over a short period of time at Silicon Valley Bank, Signature Bank and First Republic Bank that resulted in the failure of those institutions;

●

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

●

the ability to successfully manage credit risk;

●

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

●

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

●

the concentration of large loans to certain borrowers;

●

the concentration of large deposits from certain ~~clients;~~clients, who have balances above current Federal Deposit Insurance Corporation (“FDIC”) insurance limits and may withdraw deposits to diversify their exposure;

●

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

●

risk, which may increase the dependence on non-core funding sources such as brokered deposits, and negatively impact our cost of funds;

●

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

●

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

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●

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

●

the composition of the Company’s senior leadership team and the ability to attract and retain key personnel;

●

talent and labor shortages and high rates of employee turnover;

●

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, including from nonbank competitors such as credit unions and “fintech” companies;

●

the effectiveness of the risk management framework;

●

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

●

the impact of recent and future legislative and regulatory changes, ~~including changes~~in response to ~~federal~~the recent failures of Silicon Valley Bank, Signature Bank and ~~state corporate tax rates;~~First Republic Bank;

●

risks related to climate change and the negative impact it may have on our customers and their businesses;

●

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

●

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

●

potential impairment to the goodwill the Company recorded in connection with a past acquisition;

●

changes to U.S. or state tax laws, regulations and guidance, including the new 1% excise tax on stock buybacks by publicly traded companies;

●

success at managing the risks involved in the foregoing items; and

●

any other risks described in the “Risk Factors” section of this report and in other reports filed by Bridgewater Bancshares, Inc. with the Securities and Exchange Commission.

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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~~The Company undertakes no obligation to publicly update any forward-looking statement, whether written or oral, that may be made from time to time, whether as a result of new information, future developments or otherwise.

Overview

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

~~Information Regarding COVID-19 Impact~~

Management continues to monitor and consider the impact of the ongoing COVID-19 pandemic closely, given the unpredictable nature in which it is evolving. This includes monitoring the effects of the CARES Act and Coronavirus Relief Act and the prospects for additional fiscal stimulus programs, the acceptance of COVID-19 vaccines and new variants of the virus. The situation remains fluid and management cannot estimate the duration and full impact of the

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~~COVID-19 pandemic on the economy, financial markets and the Company’s financial condition and results of operations.~~

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~~“Note 1 – Description of the Business and Summary of Significant Accounting Policies” of the notes to the consolidated financial statements included as a part of the Company’s most recent Annual Report on Form 10-K, filed with the SEC on March ~~8, 2022.~~7, 2023. Certain policies require numerous estimates and strategic or economic assumptions that may prove inaccurate or subject to variation and may significantly affect the reported results and financial position for the current period or in future periods. The use of estimates, assumptions, and judgments are necessary when financial assets and liabilities are required to be recorded or adjusted to reflect fair value. Assets carried at fair value inherently result in more financial statement volatility. Fair values and information used to record valuation adjustments for certain assets and liabilities are based on either quoted market prices or are provided by other independent third-party sources, when available. When such information is not available, management estimates valuation adjustments. Changes in underlying factors, assumptions or estimates in any of these areas could have a material impact on the future financial condition and results of operations. Management has discussed each critical accounting policy and the methodology for the identification and determination of critical accounting policies with the Company's Audit Committee.

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~~Credit Losses

~~The~~In accordance with ASC 326, Financial Instruments - Credit Losses, the allowance for ~~loan~~credit losses ~~sometimes referred~~on loans is a valuation account that is deducted from the amortized cost basis of loans to aspresent the ~~“allowance,” is established through a provision for loan losses which is charged~~net amount expected to ~~expense. Loan losses~~be collected on the loans. Loans are charged against the allowance for credit losses when management determines all or a portion of the loan balance ~~to be~~is uncollectible. Subsequent recoveries, if any, are credited to the allowance. The allowance is increased (decreased) by provisions (or reversals of) reported in the income statement as a component of provisions for credit loss. Under the new guidance, the allowance for ~~cash received on previously charged-off amounts. If the allowance is considered inadequate to absorb future loan~~credit losses on ~~existing loans~~off-balance sheet credit exposures is a liability account representing expected credit losses over the contractual period 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~~which the Company ~~will be unable~~is exposed to collect all amounts due according to the original contractual terms of the loan agreement. The collection of all amounts due according to original contractual terms means that both the contractual interest and principal payments of a loan will be collected as scheduled in the loan agreement. An impaired loan is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, or, as a practical expedient, at the loan’s observable market price, or the fair value of the underlying collateral, reduced by costs to sell on a discounted basis, is used if a loan is collateral dependent.

~~Investment Securities Impairment~~

~~Periodically, the Company may need to assess whether there have been any events or economic circumstances to indicate that a security on which there is~~credit risk resulting from 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 timeoff-balance sheet exposure.

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~~sufficient~~

The amount of each allowance account represents management's best estimate of current expected credit losses on such financial instruments using relevant available information, from internal and external sources, relating to ~~recover~~past events, current conditions and reasonable and supportable forecasts. The allowance for credit losses for loans is measured on a collective basis for portfolios of loans when similar risk characteristics exist. Loans that do not share risk characteristics are evaluated for expected credit losses on an individual basis and excluded from the ~~temporary loss.~~collective evaluation. For determining the appropriate allowance for credit losses on a collective basis, the loan portfolio is segmented into pools based upon similar risk characteristics and a lifetime loss-rate model is utilized. Management qualitatively adjusts model results for reasonable and supportable forecasts and risk factors that are not considered within the modeling processes but are relevant in assessing the expected credit losses within the loan segment. These qualitative factor adjustments may increase or decrease management's estimate of expected credit losses by a calculated percentage or amount based upon the estimated level of risk. Due to the subjective nature of these estimates the various components of the calculation require significant management judgement and certain assumptions are highly subjective. Volatility in certain credit metrics and variations between expected and actual outcomes are likely.

Investment Securities ~~on which there is~~Impairment

In accordance with ASC 326, Financial Instruments - Credit Losses, available for sale securities in unrealized loss positions are evaluated for impairment related to credit losses. For any securities classified as available for sale that are in an unrealized loss ~~that~~position, the Company assesses whether or not it intends to sell the security, or if it is ~~deemed~~more likely than not it will be required to ~~be other than temporary are~~sell the security, before recovery of its amortized cost basis. If either criteria is met, the security's amortized cost basis is written down to fair value through income with the ~~write-down~~establishment of an allowance. For securities that do not meet the aforementioned criteria, the Company evaluates whether any portion of the decline in fair value is the result of credit deterioration. In making this assessment, management considers the extent to which the amortized cost of the security exceeds its fair value, changes in credit ratings and any other known adverse conditions related to the specific security, among other factors. If the assessment indicates that a credit loss exists, an allowance for credit losses is recorded ~~as a realized loss~~for the amount by which the amortized cost basis of the security exceeds the present value of cash flows expected to be collected, limited by the amount by which the amortized cost exceeds fair value. Any impairment not recognized in ~~securities gains (losses).~~the allowance for credit losses is recognized in other comprehensive income.

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

Fair Value of Financial Instruments

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

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Level 3. Imprecision in estimating fair values can impact the carrying value of assets and liabilities and the amount of revenue or loss recorded.

Deferred Tax Asset

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

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Operating Results Overview

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


	As of and for the Three Months Ended															As of and for the Three Months Ended
	September 30,			June 30,			March 31,			December 31,			September 30,			March 31,			December 31			September 30,			June 30,			March 31,
(dollars in thousands, except per share data)	2022			2022			2022			2021			2021			2023			2022			2022			2022			2022
Per Common Share Data
Basic Earnings Per Share	$	0.49		$	0.43		$	0.40		$	0.41		$	0.41		$	0.38		$	0.46		$	0.49		$	0.43		$	0.40
Diluted Earnings Per Share		0.47			0.41			0.39			0.39			0.40			0.37			0.45			0.47			0.41			0.39
Adjusted Diluted Earnings Per Common Share ⁽¹⁾		0.47			0.41			0.39			0.39			0.41
Book Value Per Share		11.44			11.14			11.12			11.09			10.73			12.05			11.80			11.44			11.14			11.12
Tangible Book Value Per Share ⁽¹⁾		11.33			11.03			11.01			10.98			10.62			11.95			11.69			11.33			11.03			11.01
Basic Weighted Average Shares Outstanding		27,520,117			27,839,260			28,123,809			28,004,334			28,047,280			27,726,894			27,558,983			27,520,117			27,839,260			28,123,809
Diluted Weighted Average Shares Outstanding		28,592,854			28,803,842			29,156,085			29,038,785			29,110,547			28,490,046			28,527,306			28,592,854			28,803,842			29,156,085
Shares Outstanding at Period End		27,587,978			27,677,372			28,150,389			28,206,566			28,066,822			27,845,244			27,751,950			27,587,978			27,677,372			28,150,389

Selected Performance Ratios
Return on Average Assets (Annualized)		1.46	%		1.38	%		1.42	%		1.46	%		1.37	%		1.07	%		1.28	%		1.46	%		1.38	%		1.42	%
Pre-Provision Net Revenue Return on Average Assets (Annualized) ⁽¹⁾		2.15			2.19			2.12			2.11			2.09			1.49			1.82			2.15			2.19			2.12
Return on Average Shareholders' Equity (Annualized)		14.99			13.55			12.98			13.27			13.81			11.70			14.06			14.99			13.55			12.98
Return on Average Tangible Common Equity (Annualized)⁽¹⁾		17.03			15.26			14.56			14.78			15.47			12.90			15.86			17.03			15.26			14.56
Yield on Interest Earning Assets⁽²⁾		4.37			4.16			4.13			4.06			4.14			4.91			4.67			4.37			4.16			4.13
Yield on Total Loans, Gross⁽²⁾		4.59			4.45			4.45			4.49			4.65			5.06			4.87			4.59			4.45			4.45
Cost of Interest Bearing Liabilities		1.30			0.86			0.80			0.86			0.88			3.03			2.22			1.30			0.86			0.80
Cost of Funds		0.93			0.63			0.59			0.61			0.65			2.41			1.67			0.93			0.63			0.59
Cost of Total Deposits		0.73			0.46			0.43			0.45			0.48			2.01			1.31			0.73			0.46			0.43
Net Interest Margin ⁽²⁾		3.53			3.58			3.60			3.51			3.54			2.72			3.16			3.53			3.58			3.60
Core Net Interest Margin ⁽¹⁾⁽²⁾		3.38			3.34			3.34			3.25			3.22			2.62			3.05			3.38			3.34			3.34
Efficiency Ratio⁽¹⁾		39.8			40.2			42.4			40.8			43.9			46.2			43.8			39.8			40.2			42.4
Adjusted Efficiency Ratio ⁽¹⁾		39.4			40.0			42.0			40.3			41.5
Noninterest Expense to Average Assets (Annualized)		1.42			1.47			1.56			1.45			1.58			1.31			1.42			1.42			1.47			1.56
Adjusted Noninterest Expense to Average Assets (Annualized) ⁽¹⁾		1.41			1.47			1.55			1.43			1.49
Loan to Deposit Ratio		102.3			100.7			98.4			95.7			95.0			108.0			104.5			102.3			100.7			98.4
Core Deposits to Total Deposits ⁽³⁾		83.0			82.9			84.3			85.4			83.3			72.4			74.6			83.0			82.9			84.3
Tangible Common Equity to Tangible Assets ⁽¹⁾		7.57			7.87			8.60			8.91			8.81			7.23			7.48			7.57			7.87			8.60

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

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

(3)	Core deposits are defined as total deposits less brokered deposits and certificates of deposit greater than $250,000.

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Selected Financial Data

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


	As of and for the Three Months Ended										As of and for the Three Months Ended
	September 30,		June 30,		March 31,		December 31,		September 30,		March 31,		December 31,		September 30,		June 30,		March 31,
(dollars in thousands)	2022		2022		2022		2021		2021		2023		2022		2022		2022		2022
Selected Balance Sheet Data
Total Assets	$	4,128,987	$	3,883,264	$	3,607,920	$	3,477,659	$	3,389,125	$	4,602,899	$	4,345,662	$	4,128,987	$	3,883,264	$	3,607,920
Total Loans, Gross		3,380,082		3,225,885		2,987,967		2,819,472		2,712,012		3,684,360		3,569,446		3,380,082		3,225,885		2,987,967
Allowance for Loan Losses		46,491		44,711		41,692		40,020		38,901
Allowance for Credit Losses												50,148		47,996		46,491		44,711		41,692
Goodwill and Other Intangibles		2,962		3,009		3,057		3,105		3,153		2,866		2,914		2,962		3,009		3,057

Deposits		3,305,074		3,201,953		3,035,611		2,946,237		2,854,157		3,411,123		3,416,543		3,305,074		3,201,953		3,035,611
Tangible Common Equity⁽¹⁾		312,531		305,360		309,870		309,653		298,135		332,626		324,636		312,531		305,360		309,870
Total Shareholders' Equity		382,007		374,883		379,441		379,272		367,803		402,006		394,064		382,007		374,883		379,441
Average Total Assets - Quarter-to-Date		3,948,201		3,743,575		3,513,798		3,403,270		3,332,301		4,405,234		4,251,345		3,948,201		3,743,575		3,513,798
Average Shareholders' Equity - Quarter-to-Date		384,020		381,448		383,024		374,035		330,604		403,533		387,589		384,020		381,448		383,024

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

For the Three Months Ended

September 30,

June 30,

March 31,

December 31,

September 30,
(dollars in thousands)

2022

2022

2022

2021

2021
Selected Income Statement Data

Interest Income

$
42,359

$
37,782

$
34,694

$
33,775

$
33,517
Interest Expense

8,264

5,252

4,514

4,622

4,844
Net Interest Income

34,095

32,530

30,180

29,153

28,673
Provision for Loan Losses

1,500

3,025

1,675

1,150

1,300
Net Interest Income after Provision for Loan Losses

32,595

29,505

28,505

28,003

27,373
Noninterest Income

1,387

1,650

1,557

1,288

1,410
Noninterest Expense

14,157

13,752

13,508

12,459

13,236
Income Before Income Taxes

19,825

17,403

16,554

16,832

15,547
Provision for Income Taxes

5,312

4,521

4,292

4,318

4,038
Net Income

14,513

12,882

12,262

12,514

11,509
Preferred Stock Dividends

(1,013)

(1,014)

(1,013)

(1,171)

—
Net Income Available to Common Shareholders

$
13,500

$
11,868

$
11,249

$
11,343

$
11,509

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~~Discussion and Analysis of Results of Operations~~

~~Net Income~~

Net income was $14.5 million for the third quarter of 2022, a 26.1% increase compared to net income of $11.5 million for the third quarter of 2021. Earnings per diluted common share for the third quarter of 2022 were $0.47, a 19.4% increase compared to $0.40 per diluted common share for the third quarter of 2021. Net income was $39.7 million for the nine months ended September 30, 2022, a 19.5% increase compared to net income of $33.2 million for the nine months ended September 30, 2021. Net income per diluted common share for the nine months ended September 30, 2022 was $1.27, an 11.1% increase compared to $1.14 per diluted common share for the nine months ended September 30, 2021.

For the Three Months Ended

March 31,

December 31,

September 30,

June 30,

March 31,

(dollars in thousands)

2023

2022

Selected Income Statement Data

Interest Income

51,992

48,860

42,359

37,782

34,694

Interest Expense

23,425

15,967

8,264

5,252

4,514

Net Interest Income

28,567

32,893

34,095

32,530

30,180

Provision for ~~interest bearing liabilities is the net interest spread.~~ Credit Losses

625

1,500

3,025

1,675

Net Interest Income after Provision for Credit Losses

27,942

31,393

32,595

29,505

28,505

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 adjustedIncome

1,943

1,738

1,387

1,650

1,557

Noninterest Expense

14,183

15,203

14,157

13,752

13,508

Income Before Income Taxes

15,702

17,928

19,825

17,403

16,554

Provision for Income Taxes

4,060

4,193

5,312

4,521

4,292

Net Income

11,642

13,735

14,513

12,882

12,262

Preferred Stock Dividends

(1,013)

(1,014)

(1,013)

(1,014)

(1,013)

Net Income Available 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.Common Shareholders

~~Table of Contents~~10,629

~~Average Balances and Yields~~

The following tables present, for the three and nine months ended September 30, 2022 and 2021, the average balances of each principal category of assets, liabilities and shareholders’ equity, and an analysis of net interest income. The average balances are principally daily averages and, for loans, include both performing and nonperforming balances. Interest income on loans includes the effects of net deferred loan origination fees and costs accounted for as yield adjustments. These tables are presented on a tax-equivalent basis, if applicable.$

For the Three Months Ended

September 30, 2022

September 30, 2021

Average

Interest

Yield/

Average

Interest

Yield/


Balance

& Fees

Rate

Balance

& Fees

Rate

(dollars in thousands)

Interest Earning Assets:

Cash Investments

$
57,613

$
165

1.13
%
$
187,405

$
67

0.14
%
Investment Securities:

Taxable Investment Securities

461,255

3,741

3.22

314,367

1,751

2.21

Tax-Exempt Investment Securities⁽¹⁾

75,801

799

4.18

71,801

737

4.07

Total Investment Securities

537,056

4,540

3.35

386,168

2,488

2.56

Paycheck Protection Program Loans ⁽²⁾

2,424

96

15.75

76,006

1,753

9.15

Loans ⁽¹⁾⁽²⁾

3,263,390

37,724

4.59

2,579,021

29,348

4.51

Total Loans

3,265,814

37,820

4.59

2,655,027

31,101

4.65

Federal Home Loan Bank Stock

11,413

156

5.42

5,701

68

4.65

Total Interest Earning Assets

3,871,896

42,681

4.37
%

3,234,301

33,724

4.14
%
Noninterest Earning Assets

76,305

98,000

Total Assets

$
3,948,201

$
3,332,301

Interest Bearing Liabilities:

Deposits:

Interest Bearing Transaction Deposits

$
517,658

$
1,032

0.79
%
$
479,580

$
562

0.47
%
Savings and Money Market Deposits

999,932

2,494

0.99

801,354

904

0.45

Time Deposits

288,621

847

1.16

318,222

928

1.16

Brokered Deposits

447,034

1,612

1.43

440,167

1,023

0.92

Total Interest Bearing Deposits

2,253,245

5,985

1.05

2,039,323

3,417

0.66

Federal Funds Purchased

106,826

709

2.63

—

—

—

FHLB Advances

72,343

328

1.80

54,130

213

1.56

Subordinated Debentures

92,503

1,242

5.33

91,337

1,214

5.27

Total Interest Bearing Liabilities

2,524,917

8,264

1.30
%

2,184,790

4,844

0.88
%
Noninterest Bearing Liabilities:

Noninterest Bearing Transaction Deposits

991,545

784,148

Other Noninterest Bearing Liabilities

47,719

32,759

Total Noninterest Bearing Liabilities

1,039,264

816,907

Shareholders' Equity

384,020

330,604

Total Liabilities and Shareholders' Equity

$
3,948,201

$
3,332,301

Net Interest Income / Interest Rate Spread

34,417

3.07
%

28,880

3.26
%
Net Interest Margin ⁽³⁾

3.53
%

3.54
%
Taxable Equivalent Adjustment:

Tax-Exempt Investment Securities and Loans

(322)

(207)

Net Interest Income

$
34,095

$
28,673

12,721

13,500

11,868

11,249

Table of Contents

Discussion and Analysis of Results of Operations

Net Income

Net income was $11.6 million for the first quarter of 2023, compared to net income of $12.3 million for the first quarter of 2022. Earnings per diluted common share for the first quarter of 2023 were $0.37, compared to $0.39 per diluted common share for the first quarter of 2022.

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.

Table of Contents

Average Balances and Yields

The following tables present, for the three months ended March 31, 2023 and 2022, the average balances of each principal category of assets, liabilities and shareholders’ equity, and an analysis of net interest income. The average balances are principally daily averages and, for loans, include both performing and nonperforming balances. Interest income on loans includes the effects of net deferred loan origination fees and costs accounted for as yield adjustments. These tables are presented on a tax-equivalent basis, if applicable.


	For the Three Months Ended
	March 31, 2023						March 31, 2022
	Average		Interest		Yield/		Average		Interest		Yield/
	Balance		& Fees		Rate		Balance		& Fees		Rate
(dollars in thousands)
Interest Earning Assets:
Cash Investments	$	63,253	$	447	2.86	%	$	80,497	$	26	0.13	%
Investment Securities:
Taxable Investment Securities		574,242		5,958	4.21			373,021		2,255	2.45
Tax-Exempt Investment Securities⁽¹⁾		29,803		330	4.49			71,591		779	4.41
Total Investment Securities		604,045		6,288	4.22			444,612		3,034	2.77
Paycheck Protection Program Loans ⁽²⁾		999		2	1.00			18,140		563	12.58
Loans ⁽¹⁾⁽²⁾		3,629,447		45,263	5.06			2,881,845		31,275	4.40
Total Loans		3,630,446		45,265	5.06			2,899,985		31,838	4.45
Federal Home Loan Bank Stock		25,962		372	5.81			5,680		54	3.84
Total Interest Earning Assets		4,323,706		52,372	4.91	%		3,430,774		34,952	4.13	%
Noninterest Earning Assets		81,528						83,024
Total Assets	$	4,405,234					$	3,513,798
Interest Bearing Liabilities:
Deposits:
Interest Bearing Transaction Deposits	$	461,372	$	2,780	2.44	%	$	566,279	$	597	0.43	%
Savings and Money Market Deposits		1,044,794		6,499	2.52			876,580		918	0.42
Time Deposits		248,174		1,069	1.75			288,914		745	1.05
Brokered Deposits		743,465		6,026	3.29			406,648		898	0.90
Total Interest Bearing Deposits		2,497,805		16,374	2.66			2,138,421		3,158	0.60
Federal Funds Purchased		415,111		4,944	4.83			10,600		9	0.35
Notes Payable		13,750		263	7.77			—		—	—
FHLB Advances		128,222		861	2.72			42,500		150	1.43
Subordinated Debentures		78,945		983	5.05			92,286		1,197	5.26
Total Interest Bearing Liabilities		3,133,833		23,425	3.03	%		2,283,807		4,514	0.80	%
Noninterest Bearing Liabilities:
Noninterest Bearing Transaction Deposits		813,598						822,488
Other Noninterest Bearing Liabilities		54,270						24,479
Total Noninterest Bearing Liabilities		867,868						846,967
Shareholders' Equity		403,533						383,024
Total Liabilities and Shareholders' Equity	$	4,405,234					$	3,513,798
Net Interest Income / Interest Rate Spread				28,947	1.88	%				30,438	3.33	%
Net Interest Margin ⁽³⁾					2.72	%					3.60	%
Taxable Equivalent Adjustment:
Tax-Exempt Investment Securities and Loans				(380)						(258)
Net Interest Income			$	28,567					$	30,180

(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~~

For the Nine Months Ended

September 30, 2022

September 30, 2021

Average

Interest

Yield/

Average

Interest

Yield/


Balance

& Fees

Rate

Balance

& Fees

Rate

(dollars in thousands)

Interest Earning Assets:

Cash Investments

$
66,301

$
231

0.47
%
$
127,283

$
134

0.14
%
Investment Securities:

Taxable Investment Securities

417,462

8,692

2.78

310,078

5,122

2.21

Tax-Exempt Investment Securities⁽¹⁾

73,900

2,373

4.29

76,564

2,460

4.30

Total Investment Securities

491,362

11,065

3.01

386,642

7,582

2.62

Paycheck Protection Program Loans ⁽²⁾

9,575

922

12.88

124,466

5,384

5.78

Loans ⁽¹⁾⁽²⁾

3,082,924

103,204

4.48

2,402,844

82,433

4.59

Total Loans

3,092,499

104,126

4.50

2,527,310

87,817

4.65

Federal Home Loan Bank Stock

9,593

269

3.75

5,658

200

4.71

Total Interest Earning Assets

3,659,755

115,691

4.23
%

3,046,893

95,733

4.20
%
Noninterest Earning Assets

77,028

70,968

Total Assets

$
3,736,783

$
3,117,861

Interest Bearing Liabilities:

Deposits:

Interest Bearing Transaction Deposits

$
545,301

$
2,322

0.57
%
$
422,000

$
1,504

0.48
%
Savings and Money Market Deposits

934,408

4,597

0.66

763,646

2,853

0.50

Time Deposits

286,059

2,257

1.05

331,664

3,269

1.32

Brokered Deposits

419,352

3,422

1.09

407,680

2,975

0.98

Total Interest Bearing Deposits

2,185,120

12,598

0.77

1,924,990

10,601

0.74

Federal Funds Purchased

85,287

1,128

1.77

3,311

6

0.24

Notes Payable

—

—

—

2,216

61

3.66

FHLB Advances

54,227

646

1.59

56,364

669

1.59

Subordinated Debentures

92,396

3,658

5.29

79,723

3,411

5.72

Total Interest Bearing Liabilities

2,417,030

18,030

1.00
%

2,066,604

14,748

0.95
%
Noninterest Bearing Liabilities:

Noninterest Bearing Transaction Deposits

899,456

731,269

Other Noninterest Bearing Liabilities

37,463

23,228

Total Noninterest Bearing Liabilities

936,919

754,497

Shareholders' Equity

382,834

296,760

Total Liabilities and Shareholders' Equity

$
3,736,783

$
3,117,861

Net Interest Income / Interest Rate Spread

97,661

3.23
%

80,985

3.25
%
Net Interest Margin ⁽³⁾

3.57
%

3.55
%
Taxable Equivalent Adjustment:

Tax-Exempt Investment Securities and Loans

(856)

(629)

Net Interest Income

$
96,805

$
80,356

~~(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.

~~Interest Rates and Operating Interest Differential~~

~~Table of Contents~~

change in average rate by the previous period’s volume. The changes not attributable specifically to either volume or rate have been allocated to the changes due to volume. The following tables present the changes in the volume and rate of interest bearing assets and liabilities for the three months ended September 30, 2022, compared to the three months ended September 30, 2021 and for the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021:

Three Months Ended September 30, 2022

Compared with

Three Months Ended September 30, 2021

Change Due To:

Interest
(dollars in thousands)

Volume

Rate

Variance
Interest Earning Assets:

Cash Investments

$
(371)

$
469

$
98
Investment Securities:

Taxable Investment Securities

1,191

799

1,990
Tax-Exempt Investment Securities

43

19

62
Total Securities

1,234

818

2,052
Loans:

Paycheck Protection Program Loans

(2,921)

1,264

(1,657)
Loans

7,912

464

8,376
Total Loans

4,991

1,728

6,719
Federal Home Loan Bank Stock

77

11

88
Total Interest Earning Assets

$
5,931

$
3,026

$
8,957

Interest Bearing Liabilities:

Interest Bearing Transaction Deposits

$
76

$
394

$
470
Savings and Money Market Deposits

496

1,094

1,590
Time Deposits

(86)

5

(81)
Brokered Deposits

24

565

589
Total Deposits

510

2,058

2,568
Federal Funds Purchased

709

—

709
FHLB Advances

82

33

115
Subordinated Debentures

382

(354)

28
Total Interest Bearing Liabilities

1,683

1,737

3,420
Net Interest Income

$
4,248

$
1,289

$
5,537

~~Table of Contents~~

Nine Months Ended September 30, 2022

Compared with

Nine Months Ended September 30, 2021

Change Due To:

Interest
(dollars in thousands)


Volume


Rate


Variance
Interest Earning Assets:

Cash Investments

$
(213)

$
310

$
97
Investment Securities:

Taxable Investment Securities

2,235

1,335

3,570
Tax-Exempt Investment Securities

(86)

(1)

(87)
Total Securities

2,149

1,334

3,483
Loans:

Paycheck Protection Program Loans

(11,065)

6,603

(4,462)
Loans

22,672

(1,901)

20,771
Total Loans

11,607

4,702

16,309
Federal Home Loan Bank Stock

110

(41)

69
Total Interest Earning Assets

$
13,653

$
6,305

$
19,958

Interest Bearing Liabilities:

Interest Bearing Transaction Deposits

$
525

$
293

$
818
Savings and Money Market Deposits

841

903

1,744
Time Deposits

(360)

(652)

(1,012)
Brokered Deposits

95

352

447
Total Deposits

1,101

896

1,997
Federal Funds Purchased

1,084

38

1,122
Notes Payable

—

(61)

(61)
FHLB Advances

(25)

2

(23)
Subordinated Debentures

501

(254)

247
Total Interest Bearing Liabilities

2,661

621

3,282
Net Interest Income

$
10,992

$
5,684

$
16,676

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

~~Third Quarter of 2022 Compared to Third Quarter of 2021~~

Net interest income was $34.1 million for the third quarter of 2022, an increase of $5.4 million, or 18.9%, compared to $28.7 million for the third quarter of 2021. The increase in net interest income was primarily due to growth in average interest earning assets and higher yields on investment securities and core loans, offset partially by higher rates paid on deposits and lower PPP fee recognition. The increase in average interest earning assets was primarily due to strong organic growth in the loan portfolio and continued purchases of investment securities, offset partially by the forgiveness of PPP loans and the reduction of cash balances.

Net interest margin (on a fully tax-equivalent basis) for the third quarter of 2022 was 3.53%, a modest one basis point decline from 3.54% in the third quarter of 2021. Core net interest margin (on a fully tax-equivalent basis), a non-GAAP financial measure which excludes the impact of loan fees and PPP balances, interest, and fees, for the third quarter of 2022 was 3.38%, a 16 basis point increase from 3.22% in the third quarter of 2021. The Company remains focused on managing the impact of continued interest rate hikes and the evolving shape of the yield curve during this unique interest rate environment.

As the PPP loan portfolio has almost paid off, the recognition of fees associated with the originations has decreased significantly, which impacts comparability between periods. The Company recognized $90,000 of PPP origination fees during the third quarter of 2022, compared to $1.6 million during the third quarter of 2021. Remaining PPP origination fees to be recognized as of September 30, 2022 were $45,000.

~~Table of Contents~~

~~The following table summarizes PPP loan originations and net origination fees through September 30, 2022:~~

Originated

Outstanding

Program Lifetime

Number

Principal

Number

Principal

Net Origination

Net Origination
(dollars in thousands)

of Loans

Balance

of Loans

Balance

Fees Generated

Fees Earned
Round One PPP Loans

1,200

$
181,600

1

$
160

$
5,706

$
5,706
Round Two PPP Loans

651

78,386

5

1,032

3,544

3,499
Totals

1,851

$
259,986

6

$
1,192

$
9,250

$
9,205

~~Average~~ interest earning assets for the third quarter of 2022 increased $637.6 million, or 19.7%, to $3.87 billion, from $3.23 billion for the third quarter of 2021. This increase in average interest earning assets was primarily due to strong organic growth in the loan portfolio and continued purchases of investment securities, offset partially by the forgiveness of PPP loans and the reduction of cash balances. Average interest bearing liabilities increased $340.1 million, or 15.6%, to $2.52 billion for the third quarter of 2022, from $2.18 billion for the third quarter of 2021. The increase in average interest bearing liabilities was primarily due to an increase in savings and money market deposits and federal funds purchased, offset partially by a decrease in time deposits.period.

Table of Contents

Interest Rates and Operating Interest Differential

Increases and decreases in interest income and interest expense result from changes in average balances (volume) of interest earning assets and interest bearing liabilities, as well as changes in average interest rates. The following table presents the effect that these factors had on the interest earned on interest earning assets and the interest incurred on interest bearing liabilities. The effect of changes in volume is determined by multiplying the change in volume by the previous period’s average rate. Similarly, the effect of rate changes is calculated by multiplying the change in average rate by the previous period’s volume. The changes not attributable specifically to either volume or rate have been allocated to the changes due to volume. The following table presents the changes in the volume and rate of interest bearing assets and liabilities for the three months ended March 31, 2023, compared to the three months ended March 31, 2022:


	Three Months Ended March 31, 2023
	Compared with
	Three Months Ended March 31, 2022
	Change Due To:				Interest
(dollars in thousands)	Volume		Rate		Variance
Interest Earning Assets:
Cash Investments	$	(121)	$	542	$	421
Investment Securities:
Taxable Investment Securities		2,088		1,615		3,703
Tax-Exempt Investment Securities		(462)		13		(449)
Total Securities		1,626		1,628		3,254
Loans:
Paycheck Protection Program Loans		(43)		(518)		(561)
Loans		9,323		4,665		13,988
Total Loans		9,280		4,147		13,427
Federal Home Loan Bank Stock		290		28		318
Total Interest Earning Assets	$	11,075	$	6,345	$	17,420

Interest Bearing Liabilities:
Interest Bearing Transaction Deposits	$	(632)	$	2,815	$	2,183
Savings and Money Market Deposits		1,046		4,535		5,581
Time Deposits		(175)		499		324
Brokered Deposits		2,730		2,398		5,128
Total Deposits		2,969		10,247		13,216
Federal Funds Purchased		4,818		117		4,935
Notes Payable		263		—		263
FHLB Advances		576		135		711
Subordinated Debentures		(167)		(47)		(214)
Total Interest Bearing Liabilities		8,459		10,452		18,911
Net Interest Income	$	2,616	$	(4,107)	$	(1,491)

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

Net interest income was $28.6 million for the first quarter of 2023, a decrease of $1.6 million, or 5.3%, compared to $30.2 million for the first quarter of 2022. The decrease in net interest income was primarily due to higher rates paid on deposits and increased borrowings in the rising interest rate environment.

Net interest margin (on a fully tax-equivalent basis) for the first quarter of 2023 was 2.72%, an 88 basis point decrease from 3.60% in the first quarter of 2022. Core net interest margin (on a fully tax-equivalent basis), a non-GAAP financial measure which excludes the impact of loan fees and PPP balances, interest, and fees, for the first quarter of 2023 was 2.62%, a 72 basis point decrease from 3.34% in the first quarter of 2022. The decline in the margin was primarily due to higher funding costs and increased borrowings in the rising interest rate environment, offset partially by higher earning asset yields.

Table of Contents

Average interest earning assets for the first quarter of 2023 increased $892.9 million, or 26.0%, to $4.32 billion, from $3.43 billion for the first quarter of 2022. This increase in average interest earning assets was primarily due to continued organic growth in the loan portfolio and purchases of investment securities, offset partially by the forgiveness of PPP loans and the reduction of cash balances. Average interest bearing liabilities increased $850.0 million, or 37.2%, to $3.13 billion for the first quarter of 2023, from $2.28 billion for the first quarter of 2022. The increase in average interest bearing liabilities was primarily due to an increase in savings and money market deposits, brokered deposits and federal funds purchased.

Average interest earning assets produced a tax-equivalent yield of 4.91% for the first quarter of 2023, compared to 4.13% for the first quarter of 2022. The increase in the yield on interest earning assets was primarily due to growth and repricing of the loan and securities portfolios in the rising interest rate environment, offset partially by the lower recognition of PPP origination fees. The average rate paid on interest bearing liabilities was 3.03% for the first quarter of 2023, compared to 0.80% for the first quarter of 2022 primarily due to the higher rates paid on deposits, the increased utilization of federal funds purchased and FHLB advances, and drawing on the Company’s line of credit in the rising interest rate environment.

Interest Income. Total interest income, on a tax-equivalent basis, was $52.4 million for the first quarter of 2023, compared to $35.0 million for the first quarter of 2022. The $17.4 million, or 49.8%, increase in total interest income on a tax-equivalent basis was primarily due to strong organic growth in the loan portfolio and continued purchases of investment securities.

Interest income on loans, on a tax-equivalent basis, was $45.3 million for the first quarter of 2023, compared to $31.8 million for the first quarter of 2022. The $13.4 million, or 42.2%, increase was primarily due to a 25.2% increase in the average balance of loans outstanding from continued organic loan growth.

Loan interest income and loan fees remain the primary contributing factors to the changes in the yield on interest earning assets. The aggregate loan yield, excluding PPP loans, increased to 5.06% in the first quarter of 2023, which was 66 basis points higher than 4.40% in the first quarter of 2022. While loan fees have historically maintained a relatively stable contribution to the aggregate loan yield, the recent periods saw fewer loan prepayments, which historically has accelerated the recognition of loan fees. Despite the decrease in fee recognition, the Company is encouraged that the core loan yield continues to rise as new loan originations and the existing portfolio reprice in the higher rate environment.

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


	Three Months Ended
	March 31, 2023		December 31, 2022		September 30, 2022		June 30, 2022		March 31, 2022
Interest	4.95	%	4.74	%	4.42	%	4.17	%	4.15	%
Fees	0.11		0.12		0.17		0.26		0.25
Yield on Loans, Excluding PPP Loans	5.06	%	4.86	%	4.59	%	4.43	%	4.40	%

Interest Expense. Interest expense on interest bearing liabilities increased $18.9 million, or 418.9%, to $23.4 million for the first quarter of 2023, compared to $4.5 million for the first quarter of 2022. The cost of interest bearing liabilities increased 223 basis points from 0.80% in the first quarter of 2022 to 3.03% in the first quarter of 2023, primarily due to higher rates paid on deposits and increased utilization of federal funds purchased and FHLB advances in the rising interest rate environment.

Interest expense on deposits was $16.4 million for the first quarter of 2023, an increase of $13.2 million, or 418.4%, from $3.2 million for the first quarter of 2022. The cost of total deposits increased 158 basis points from 0.43% in the first quarter of 2022, to 2.01% in the first quarter of 2023, primarily due to the upward repricing of the deposit portfolio in the higher interest rate environment.

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Interest expense on borrowings was $7.1 million for the first quarter of 2023, an increase of $5.7 million, or 419.9%, from $1.4 million for the first quarter of 2022. This increase was primarily due to drawing on the Company’s line of credit and higher average balances of federal funds purchased and FHLB advances.

Provision for Credit Losses

On January 1, 2023, the Company adopted ASU No. 2016-13 “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses of Financial Instruments,” more commonly referred to as “CECL.” Upon adoption of CECL, the Company’s allowance for credit losses on loans increased $650,000 and the allowance on off-balance sheet credit exposures increased $4.9 million. The tax-effected impact of these two items totaled $3.9 million and was recorded as an adjustment to retained earnings as of January 1, 2023.

The provision for credit losses on loans was $1.5 million for the first quarter of 2023, compared to $1.7 million for the first quarter of 2022. The provision recorded in the first quarter of 2023 was primarily attributable to the more moderated growth of the loan portfolio. The allowance for credit losses on loans to total loans was 1.36% at March 31, 2023, compared to 1.40% at March 31, 2022.

The following table presents a summary of the activity in the allowance for credit losses on loans for the periods indicated:


	Three Months Ended
	March 31,
(dollars in thousands)	2023		2022
Balance at Beginning of Period	$	47,996	$	40,020
Impact of Adopting CECL		650		—
Provision for Credit Losses		1,500		1,675
Charge-offs		(4)		(15)
Recoveries		6		12
Balance at End of Period	$	50,148	$	41,692

The provision for credit losses on off-balance sheet credit exposures was a negative provision of ($875,000) for the first quarter of 2023 and zero for the first quarter of 2022. The negative provision for the first quarter of 2023 was due to a reduction in outstanding unfunded commitments primarily attributable to the migration to funded loans. The allowance for credit losses on off-balance sheet credit exposures was $4.3 million at March 31, 2023, compared to $360,000 at December 31, 2022.

The following table presents a summary of the activity in the provision for credit losses for the periods indicated:


	Three Months Ended
	March 31,				Increase/
(dollars in thousands)	2023		2022		(Decrease)
Provision for Credit Losses on Loans	$	1,500	$	1,675	$	(175)
Provision for Credit Losses for Off-Balance Sheet Credit Exposures		(875)		—		(875)
Provision for Credit Losses	$	625	$	1,675	$	(1,050)

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Noninterest Income

Noninterest income was $1.9 million for the first quarter of 2023, an increase of $386,000 from $1.6 million for the first quarter of 2022. The increase was primarily due to increased letter of credit fees and FHLB prepayment income, offset partially by no recorded swap fees.

The following table presents the major components of noninterest income for the periods indicated:


	Three Months Ended
	March 31,				Increase/
(dollars in thousands)	2023		2022		(Decrease)
Noninterest Income:
Customer Service Fees	$	349	$	281	$	68
Net Loss on Sales of Securities		(56)		—		(56)
Letter of Credit Fees		634		242		392
Debit Card Interchange Fees		138		133		5
Swap Fees		—		557		(557)
Bank-Owned Life Insurance		234		148		86
FHLB Prepayment Income		299		—		299
Other Income		345		196		149
Totals	$	1,943	$	1,557	$	386

Noninterest Expense

Noninterest expense was $14.2 million for the first quarter of 2023, an increase of $675,000 from $13.5 million for the first quarter of 2022. The increase was primarily attributable to increases in the FDIC insurance assessment and derivative collateral fees, offset partially by declines of marketing and advertising and other expense.

The Company had 246 full-time equivalent employees at the end of the first quarter of 2023, compared to 229 employees at the end of the first quarter of 2022.

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, as well as other non-routine items, within noninterest expense.

The efficiency ratio was 46.2% for the first quarter of 2023, compared to 42.4% for the first quarter of 2022. The efficiencies of the Company's "branch-light" model have positioned the Company well to continue navigating a challenging environment for a more spread-based revenue model.

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The following table presents the major components of noninterest expense for the periods indicated:


	Three Months Ended
	March 31,				Increase/
(dollars in thousands)	2023		2022		(Decrease)
Noninterest Expense:
Salaries and Employee Benefits	$	8,815	$	8,694	$	121
Occupancy and Equipment		1,209		1,085		124
FDIC Insurance Assessment		665		360		305
Data Processing		357		297		60
Professional and Consulting Fees		755		696		59
Derivative Collateral Fees		380		2		378
Information Technology and Telecommunications		683		578		105
Marketing and Advertising		262		626		(364)
Intangible Asset Amortization		48		48		—
Amortization of Tax Credit Investments		114		117		(3)
Other Expense		895		1,005		(110)
Totals	$	14,183	$	13,508	$	675

Income Tax Expense

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

Income tax expense was $4.1 million for the first quarter of 2023, compared to $4.3 million for the first quarter of 2022. The effective combined federal and state income tax rate for both the first quarter of 2023 and the first quarter of 2022 was 25.9%.

Average interest earning assets produced a tax-equivalent yield of 4.37% for the third quarter of 2022, compared to 4.14% for the third quarter of 2021. The increase in the yield on interest earning assets was primarily due to growth and repricing in the rising interest rate environment, offset partially by the lower recognition of PPP origination fees. The average rate paid on interest bearing liabilities was 1.30% for the third quarter of 2022, compared to 0.88% for the third quarter of 2021 primarily due to higher rates paid on deposits and the increased utilization of federal funds purchased and FHLB advances in the rising interest rate environment.

~~Interest Income.~~ Total interest income, on a tax-equivalent basis, was $42.7 million for the third quarter of 2022, compared to $33.7 million for the third quarter of 2021. The $9.0 million, or 26.6%, increase in total interest income on a tax-equivalent basis was primarily due to continued organic growth in the loan portfolio and continued purchases of investment securities, offset partially by a reduction in the recognition of PPP origination fees as the PPP loan portfolio has almost fully paid off.

Interest income on loans, on a tax-equivalent basis, was $37.8 million for the third quarter of 2022, compared to $31.1 million for the third quarter of 2021. The $6.7 million, or 21.6%, increase was primarily due to a 23.0% increase in the average balance of loans outstanding from continued organic loan growth.

Loan interest income and loan fees remain the primary contributing factors to the changes in the yield on interest earning assets. The aggregate loan yield, excluding PPP loans, increased to 4.59% in the ~~third quarter of 2022, which was eight basis points higher than 4.51% in the~~ ~~third quarter of 2021~~. While loan fees have maintained a relatively stable contribution to the aggregate loan yield, the current period was impacted by fewer loan prepayments, which historically has accelerated the recognition of loan fees. Despite the decrease in fee recognition, the Company is encouraged that the core loan yield continues to rise as new loan originations and the existing portfolio reprice in the higher rate environment.

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

Three Months Ended

September 30, 2022

June 30, 2022

March 31, 2022

December 31, 2021

September 30, 2021

Interest

4.42
%

4.17
%

4.15
%

4.20
%

4.28
%
Fees

0.17

0.26

0.25

0.21

0.23

Yield on Loans, Excluding PPP Loans

4.59
%

4.43
%

4.40
%

4.41
%

4.51
%

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~~Interest Expense.~~ ~~Interest expense on interest bearing liabilities increased $3.4 million, or 70.6%, to $8.3 million for the third quarter of 2022, compared to $4.8 million for the third quarter of 2021.~~ ~~The cost of interest bearing liabilities increased 42 basis points from 0.88% in the~~ ~~third quarter of 2021~~ ~~to 1.30% in the~~ ~~third quarter of 2022, primarily due to higher rates paid on deposits and increased utilization of federal funds purchased and FHLB advances in the rising interest rate environment.~~

Interest expense on deposits was $6.0 million for the third quarter of 2022, an increase of $2.6 million, or 75.1%, from $3.4 million for the third quarter of 2021. The cost of total deposits increased 25 basis points from 0.48% in the third quarter of 2021, to 0.73% in the third quarter of 2022, primarily due to ~~the upward repricing of the deposit portfolio in the higher interest rate environment.~~

Interest expense on borrowings increased $853,000 to $2.3 million for the third quarter of 2022, compared to $1.4 million for the third quarter of 2021. This increase was primarily due to higher average balances of federal funds purchased and FHLB advances.

~~Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021~~

Net interest income was $96.8 million for the nine months ended September 30, 2022, an increase of $16.4 million, or 20.5%, compared to $80.4 million for the nine months ended September 30, 2021. The increase in net interest income was primarily due to growth in average interest earning assets, offset partially by lower PPP fee recognition and higher average balances of deposits and federal funds purchased.

Net interest margin (on a fully tax-equivalent basis) for the nine months ended September 30, 2022 was 3.57%, compared to 3.55% for the nine months ended September 30, 2021, an increase of two basis points. Core net interest margin (on a fully tax-equivalent basis), a non-GAAP financial measure which excludes the impact of loan fees and PPP balances, interest, and fees, for the nine months ended September 30, 2022 was 3.35%, a six basis point increase from 3.29% for the nine months ended September 30, ~~2021.~~

Average interest earning assets for the nine months ended September 30, 2022 increased $612.9 million, or 20.1%, to $3.66 billion from $3.05 billion for the nine months ended September 30, 2021. This increase in average interest earning assets was primarily due to strong organic growth in the loan portfolio and continued purchases of investment securities, offset partially by the forgiveness of PPP loans and the reduction of cash balances. Average interest bearing liabilities increased $350.4 million, or 17.0%, to $2.42 billion for the nine months ended September 30, 2022, from $2.07 billion for the nine months ended September 30, 2021. The increase in average interest bearing liabilities was primarily due to an increase in interest bearing, nonmaturity deposits and federal funds purchased, offset partially by a decrease in time deposits.

Average interest earning assets produced a tax-equivalent yield of 4.23% for the nine months ended September 30, 2022, compared to 4.20% for the nine months ended September 30, 2021. The average rate paid on interest bearing liabilities was 1.00% for the nine months ended September 30, 2022, compared to 0.95% for the nine months ended September 30, 2021.

~~Interest Income.~~ Total interest income on a tax-equivalent basis was $115.7 million for the nine months ended September 30, 2022, compared to $95.7 million for the nine months ended September 30, 2021. The $20.0 million, or 20.8%, increase in total interest income on a tax-equivalent basis was primarily due to strong organic growth in the loan portfolio and continued purchases of investment securities, offset partially by a reduction in the recognition of PPP origination fees as the PPP loan portfolio has almost fully paid off.

Interest income on the investment securities portfolio, on a fully-tax equivalent basis, increased $3.5 million, or 45.9%, during the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021, primarily due to a $104.7 million, or 27.1%, increase in average balances between the periods.

Interest income on loans, on a fully-tax equivalent basis, for the nine months ended September 30, 2022 was $104.1 million, compared to $87.8 million for the nine months ended September 30, 2021. The $16.3 million, or 18.6%,

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~~increase was primarily due to a 22.4% increase in the average balance of loans outstanding, which was offset partially by an 11 basis point decline in the average yield on loans, excluding PPP.~~

~~Interest Expense.~~ Interest expense on interest bearing liabilities increased $3.3 million, or 22.3%, to $18.0 million for the nine months ended September 30, 2022, compared to $14.7 million for the nine months ended September 30, 2021, primarily due to higher deposit balances and rates paid on deposits and the increased utilization of federal funds purchased in the rising interest rate environment.

Interest expense on deposits increased to $12.6 million for the nine months ended September 30, 2022, compared to $10.6 million for the nine months ended September 30, 2021. The $2.0 million, or 18.8%, increase in interest expense on deposits was primarily due to the upward repricing of the deposit portfolio in the higher interest rate environment as well as an increase in the average balance of interest bearing deposits. The increase in the average balance of interest bearing deposits resulted primarily from increases in interest bearing transaction deposits, savings and money market deposits, and brokered deposits, offset partially by a decline in time deposits.

Interest expense on borrowings increased $1.3 million to $5.4 million for the nine months ended September 30, 2022, compared to $4.1 million for the nine months ended September 30, 2021. This increase was primarily due to an increase in federal funds purchased in the rising interest rate environment.

~~Provision for Loan Losses~~

The provision for loan losses was $1.5 million for the third quarter of 2022, an increase of $200,000, compared to the provision for loan losses of $1.3 million for the third quarter of 2021. The provision for loan losses was $6.2 million for the nine months ended September 30, 2022, an increase of $2.2 million compared to the provision for loan losses of $4.0 million for the nine months ended September 30, 2021. The increase in the provision for loan losses was primarily attributable to the robust growth of the loan portfolio. The allowance for loan losses to total loans was 1.38% at September 30, 2022, compared to 1.43% at September 30, 2021.

~~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 a summary of the activity in the allowance for loan losses for the periods indicated:~~

Three Months Ended

Nine Months Ended

September 30,

September 30,
(dollars in thousands)

2022

2021

2022

2021
Balance at Beginning of Period

$
44,711

$
37,591

$
40,020

$
34,841
Provision for Loan Losses

1,500

1,300

6,200

4,000
Charge-offs

(5)

(20)

(34)

(37)
Recoveries

285

30

305

97
Balance at End of Period

$
46,491

$
38,901

$
46,491

$
38,901

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~~Noninterest Income~~

Noninterest income was $1.4 million for the third quarter of 2022, a decrease of $23,000 from $1.4 million for the third quarter of 2021. The decrease was primarily due to decreased letter of credit fees, offset partially by an increase in bank-owned life insurance income and other income. Noninterest income was $4.6 million for the nine months ended September 30, 2022, an increase of $573,000, compared to $4.0 million for the nine months ended September 30, 2021. The increase was primarily due to increased customer service fees, letter of credit fees, bank-owned life insurance income, and swap fees, offset partially by lower gains on sales of securities.

~~The following table presents the major components of noninterest income for the periods indicated:~~

Three Months Ended

Nine Months Ended

September 30,

Increase/

September 30,

Increase/
(dollars in thousands)

2022

2021

(Decrease)

2022

2021

(Decrease)
Noninterest Income:

Customer Service Fees

$
313

$
268

$
45

$
892

$
733

$
159
Net Gain on Sales of Securities

—

48

(48)

52

750

(698)
Letter of Credit Fees

428

577

(149)

1,234

1,135

99
Debit Card Interchange Fees

153

143

10

438

414

24
Swap Fees

—

—

—

557

—

557
Bank-Owned Life Insurance

227

166

61

524

166

358
Other Income

266

208

58

897

823

74
Totals

$
1,387

$
1,410

$
(23)

$
4,594

$
4,021

$
573

~~Noninterest Expense~~

~~Third Quarter of 2022 Compared to Third Quarter of 2021~~

Noninterest expense was $14.2 million for the third quarter of 2022, an increase of $921,000 from $13.2 million for the third quarter of 2021. The increase was primarily driven by a $1.1 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, offset partially by lower debt prepayment fees.

~~Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021~~

Noninterest expense was $41.4 million for the nine months ended September 30, 2022, an increase of $5.8 million, or 16.2%, from $35.6 million for the nine months ended September 30, 2021. The increase was primarily driven by a $4.2 million increase in salaries and employee benefits, a $611,000 increase in marketing and advertising expense, a $377,000 increase in professional and consulting fees, and a $691,000 increase in other expenses, offset partially by lower debt prepayment fees.

The Company continues to add key talent across the organization. Full-time equivalent employees increased from 219 at the end of the third quarter of 2021 to 246 at the end of the third quarter of 2022.

~~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, as well as other non-routine items, within noninterest expense.

The efficiency ratio was 39.8% for the third quarter of 2022, compared to 43.9% for the third quarter of 2021. Excluding the impact of certain non-routine income and expenses, the adjusted efficiency ratio, a non-GAAP financial

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~~measure, was 39.4% for the third quarter of 2022, compared to 41.5% for the third quarter of 2021. The adjusted efficiency ratio for the nine months ended September 30,~~ 2022 and 2021 was 40.4% and 41.3%, respectively. The efficiencies of the Company's "branch-light" model have positioned the Company well to continue making investments in technology and branding as the industry adapts to evolving client behavior.

~~The following table presents the major components of noninterest expense for the periods indicated:~~

Three Months Ended

Nine Months Ended

September 30,

Increase/

September 30,

Increase/
(dollars in thousands)

2022

2021

(Decrease)

2022

2021

(Decrease)
Noninterest Expense:

Salaries and Employee Benefits

$
9,449

$
8,309

$
1,140

$
27,120

$
22,923

$
4,197
Occupancy and Equipment

1,086

942

144

3,213

2,977

236
FDIC Insurance Assessment

315

355

(40)

1,005

960

45
Data Processing

372

325

47

1,025

916

109
Professional and Consulting Fees

716

708

8

2,181

1,804

377
Information Technology and Telecommunications

650

598

52

1,822

1,609

213
Marketing and Advertising

479

418

61

1,629

1,018

611
Intangible Asset Amortization

48

48

—

143

143

—
Amortization of Tax Credit Investments

114

152

(38)

294

410

(116)
Debt Prepayment Fees

—

582

(582)

—

582

(582)
Other Expense

928

799

129

2,985

2,294

691
Totals

$
14,157

$
13,236

$
921

$
41,417

$
35,636

$
5,781

~~Income Tax Expense~~

Income tax expense was $5.3 million for the third quarter of 2022, compared to $4.0 million for the third quarter of 2021. The effective combined federal and state income tax rate for the third quarter of 2022 was 26.8%, compared to 26.0% for the third quarter of 2021. Income tax expense was $14.1 million for the nine months ended September 30, 2022, compared to $11.6 million for the nine months ended September 30, 2021. The effective combined federal and state income tax rate for the nine months ended September 30, 2022 and 2021 was 26.3% and 25.9%, respectively.

Financial Condition

Assets

Total assets at ~~September 30, 2022~~March 31, 2023 were ~~$4.13~~$4.60 billion, an increase of ~~$651.3~~$257.2 million, or ~~18.7%~~5.9%, over total assets of ~~$3.48~~$4.35 billion at December 31, ~~2021,~~2022, and an increase of ~~$739.9~~$995.0 million, or ~~21.8%~~27.6%, over total assets of ~~$3.39~~$3.61 billion at ~~September 30, 2021.~~March 31, 2022. The growth in both periods was primarily driven by strong organic loan growth, ~~and~~ purchases of investment securities ~~offset partially by a decrease~~and an increase in cash and cash equivalents.

Total gross loans at ~~September 30, 2022~~March 31, 2023 were ~~$3.38~~$3.68 billion, an increase of ~~$560.6~~$114.9 million, or ~~19.9%~~3.2%, over total gross loans of ~~$2.82~~$3.57 billion at December 31, ~~2021,~~2022, and an increase of ~~$668.1~~$696.4 million, or ~~24.6%~~23.3%, over total gross loans of ~~$2.71~~$2.99 billion at ~~September 30, 2021.~~March 31, 2022. The increase in the loan portfolio during the ~~third~~first quarter of ~~2022~~2023 was primarily due to growth in the commercial and multifamily segments, offset partially by a decrease in the construction and land development segment, which was primarily the result of completed construction projects migrating to permanent financing.across all segments. Gross loans grew ~~$154.2 million during the third quarter of 2022, or 19.0%~~ on an annualized ~~basis.~~basis of 13.1% during the first quarter of 2023. While the Company’s loan growth in the ~~third~~first quarter of ~~2022~~2023 remained strong, the pace ~~began~~continues to moderate slightly ~~compared to~~

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~~the first half of 2022~~ due to active balance sheet management to align loan growth with the funding outlook, sales of participations on larger originations to manage growth, and ultimately the impact of the higher interest rate environment on the number of deals that ~~made financial sense.~~meet underwriting standards.

Investment Securities Portfolio

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

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flows and are maintained at levels management believes are appropriate to ensure future flexibility in meeting anticipated funding needs.

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

Securities available for sale were ~~$542.0~~$559.4 million at ~~September 30, 2022,~~March 31, 2023, compared to ~~$439.4~~$548.6 million at December 31, ~~2021,~~2022, an increase of ~~$102.6~~$10.8 million or ~~23.4%~~2.0%. At ~~September 30, 2022, municipal securities represented 31.4% of the investment securities portfolio,~~March 31, 2023, U.S. government agency mortgage-backed securities represented ~~29.6%~~26.5% of the portfolio, ~~SBA~~municipal securities represented ~~4.2%~~22.6% of the portfolio, corporate securities represented ~~19.9%~~21.1% of the portfolio, U.S. treasury securities represented ~~0.4%~~0.5% of the portfolio, ~~asset-backed~~SBA securities represented ~~8.7%~~5.5% of the portfolio, other mortgage-backed securities represented 14.1% of the portfolio, and ~~other mortgage-backed~~asset-backed securities represented ~~5.8%~~9.7% of the portfolio.

The following table presents the amortized cost and fair value of securities available for sale, by type, at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021:~~2022:


	September 30, 2022				December 31, 2021				March 31, 2023				December 31, 2022
	Amortized		Fair		Amortized		Fair		Amortized		Fair		Amortized		Fair
(dollars in thousands)	Cost		Value		Cost		Value		Cost		Value		Cost		Value
U.S. Treasury Securities	$	2,374	$	2,338	$	756	$	754	$	2,762	$	2,739	$	2,621	$	2,580
SBA Securities		22,585		22,540		30,474		30,370		30,331		30,799		20,957		20,877
Mortgage-Backed Securities Issued or Guaranteed by U.S. Agencies (MBS):
Residential Pass-Through:
Guaranteed by GNMA		54,852		54,127		671		702		45,242		44,643		55,200		54,441
Issued by FNMA and FHLMC		26,693		23,464		20,649		20,363		25,765		23,021		26,159		22,960
Other Residential Mortgage-Backed Securities		81,747		72,421		83,394		82,271		79,137		70,489		80,299		70,184
Commercial Mortgage-Backed Securities		11,126		10,518		10,646		11,138		10,911		10,408		10,993		10,345
All Other Commercial MBS		33,555		31,055		10,203		10,063		79,462		78,677		80,268		79,854
Total MBS		207,973		191,585		125,563		124,537		240,517		227,238		252,919		237,784
Municipal Securities		196,102		170,236		151,665		158,369		146,810		126,598		156,506		131,354
Corporate Securities		113,041		108,060		81,925		84,480		127,170		117,895		116,871		109,827
Asset-Backed Securities		47,359		47,248		39,867		40,852		54,424		54,161		46,623		46,191
Total	$	589,434	$	542,007	$	430,250	$	439,362	$	602,014	$	559,430	$	596,497	$	548,613

Loan Portfolio

The Company focuses on lending to borrowers located or investing in the Minneapolis-St. Paul-Bloomington, MN-WI Metropolitan Statistical Area across a diverse range of industries and property types. The Company lends primarily to commercial customers, consisting of loans secured by nonfarm, nonresidential properties, multifamily

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residential properties, land, and non-real estate business assets. Responsive service, local decision making, and an efficient turnaround time from application to closing have been significant factors in growing the loan portfolio.

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

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Total gross loans increased ~~$560.6~~$114.9 million to ~~$3.38~~$3.68 billion at ~~September 30, 2022,~~March 31, 2023, compared to ~~$2.82~~$3.57 billion at December 31, ~~2021,~~2022, and increased ~~$668.1~~$696.4 million from ~~$2.71~~$2.99 billion at ~~September 30, 2021.~~March 31, 2022. As of ~~September 30, 2022,~~March 31, 2023, commercial loans increased $18.8 million, construction and land development loans increased ~~$54.1~~$16.7 million ~~multifamily~~and 1-4 family mortgage loans increased ~~$320.3 million, and nonowner occupied CRE loans increased $82.1~~$24.7 million, when compared to December 31, ~~2021.~~2022. Collectively, the Company’s annualized loan growth for the ~~nine~~three months ended ~~September 30, 2022, excluding PPP loans,~~March 31, 2023 was ~~28.0%~~13.1%.

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


	September 30, 2022				June 30, 2022				March 31, 2022				December 31, 2021				September 30, 2021				March 31, 2023				December 31, 2022				September 30, 2022				June 30, 2022				March 31, 2022
(dollars in thousands)	Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent
Commercial	$	412,448	12.2	%	$	403,569	12.5	%	$	363,290	12.2	%	$	360,169	12.8	%	$	350,081	12.9	%	$	454,193	12.3	%	$	435,344	12.2	%	$	412,448	12.2	%	$	403,569	12.5	%	$	363,290	12.2	%
Paycheck Protection Program		1,192	—			4,860	0.2			12,309	0.4			26,162	0.9			54,190	2.0			963	—			1,049	—			1,192	—			4,860	0.2			12,309	0.4
Construction and Land Development		335,557	9.9			359,191	11.1			321,131	10.7			281,474	10.0			257,167	9.5			312,277	8.5			295,554	8.3			280,380	8.3			305,552	9.5			272,333	9.1
1-4 Family Construction																						85,797	2.3			70,242	2.0			55,177	1.6			53,639	1.6			48,798	1.6
Real Estate Mortgage:
1 - 4 Family Mortgage		341,102	10.1			334,815	10.4			312,201	10.5			305,317	10.8			290,535	10.7			380,210	10.3			355,474	10.0			341,102	10.1			334,815	10.4			312,201	10.5
Multifamily		1,230,509	36.4			1,087,865	33.7			1,012,623	33.9			910,243	32.3			865,172	31.9			1,320,081	35.8			1,306,738	36.6			1,230,509	36.4			1,087,865	33.7			1,012,623	33.9
CRE Owner Occupied		151,088	4.5			142,214	4.4			117,969	3.9			111,096	4.0			101,834	3.8			158,650	4.3			149,905	4.2			151,088	4.5			142,214	4.4			117,969	3.9
CRE Nonowner Occupied		900,691	26.7			886,432	27.5			840,463	28.1			818,569	29.0			786,271	29.0			962,671	26.2			947,008	26.5			900,691	26.7			886,432	27.5			840,463	28.1
Total Real Estate Mortgage Loans		2,623,390	77.7			2,451,326	76.0			2,283,256	76.4			2,145,225	76.1			2,043,812	75.4			2,821,612	76.6			2,759,125	77.3			2,623,390	77.7			2,451,326	76.0			2,283,256	76.4
Consumer and Other		7,495	0.2			6,939	0.2			7,981	0.3			6,442	0.2			6,762	0.2			9,518	0.3			8,132	0.2			7,495	0.2			6,939	0.2			7,981	0.3
Total Loans, Gross		3,380,082	100.0	%		3,225,885	100.0	%		2,987,967	100.0	%		2,819,472	100.0	%		2,712,012	100.0	%		3,684,360	100.0	%		3,569,446	100.0	%		3,380,082	100.0	%		3,225,885	100.0	%		2,987,967	100.0	%
Allowance for Loan Losses		(46,491)				(44,711)				(41,692)				(40,020)				(38,901)
Allowance for Credit Losses																						(50,148)				(47,996)				(46,491)				(44,711)				(41,692)
Net Deferred Loan Fees		(9,088)				(9,536)				(9,065)				(9,535)				(10,199)				(8,735)				(9,293)				(9,088)				(9,536)				(9,065)
Total Loans, Net	$	3,324,503			$	3,171,638			$	2,937,210			$	2,769,917			$	2,662,912			$	3,625,477			$	3,512,157			$	3,324,503			$	3,171,638			$	2,937,210

The Company’s primary focus throughout its history has been on real estate mortgage lending, which constituted ~~77.7%~~76.6% of the portfolio as of ~~September 30, 2022.~~March 31, 2023. The composition of the portfolio has remained relatively consistent with prior periods and the Company does not expect any significant changes in the foreseeable future in the composition of the loan portfolio or in the emphasis on real estate lending.

As of ~~September 30, 2022,~~March 31, 2023, investor CRE loans totaled ~~$2.47~~$2.68 billion, consisting of ~~$900.7~~$962.7 million of loans secured by nonowner occupied CRE, ~~$1.23~~$1.32 billion of loans secured by multifamily residential properties, $85.8 million of 1-4 family construction and ~~$335.6~~$312.3 million of construction and land development loans. Investor CRE loans represented ~~73.0%~~72.8% of the total gross loan portfolio and ~~501.4%~~514.0% of the Bank’s total risk-based capital at ~~September 30, 2022,~~March 31, 2023, compared to ~~483.4%~~514.9% at December 31, ~~2021.~~2022.

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The following tables present time to contractual maturity and sensitivity to interest rate changes for the loan portfolio at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021:~~2022:


	As of September 30, 2022								As of March 31, 2023
	Due in One Year		More Than One		More Than Five		After		Due in One Year		More Than One		More Than Five		After
(dollars in thousands)	or Less		Year to Five Years		Year to Fifteen Years		Fifteen Years		or Less		Year to Five Years		Year to Fifteen Years		Fifteen Years
Commercial	$	136,722	$	188,471	$	84,190	$	3,065	$	152,863	$	203,476	$	94,837	$	3,017
Paycheck Protection Program		—		1,192		—		—		—		963		—		—
Construction and Land Development		122,022		165,567		47,865		103		138,516		100,173		60,451		13,137
1-4 Family Construction										50,192		31,820		3,785		—
Real Estate Mortgage:
1 - 4 Family Mortgage		51,415		205,763		83,259		665		52,500		234,500		92,553		657
Multifamily		87,070		452,491		638,451		52,497		161,199		453,561		636,983		68,338
CRE Owner Occupied		5,418		44,112		101,558		—		5,128		57,436		96,086		—
CRE Nonowner Occupied		121,926		442,063		336,702		—		118,092		502,519		342,060		—
Total Real Estate Mortgage Loans		265,829		1,144,429		1,159,970		53,162		336,919		1,248,016		1,167,682		68,995
Consumer and Other		4,290		2,996		—		209		1,397		7,927		—		194
Total Loans, Gross	$	528,863	$	1,502,655	$	1,292,025	$	56,539	$	679,887	$	1,592,375	$	1,326,755	$	85,343
Interest Rate Sensitivity:
Fixed Interest Rates	$	260,671	$	1,141,193	$	788,065	$	4,519	$	357,515	$	1,253,088	$	793,013	$	22,064
Floating or Adjustable Rates		268,192		361,462		503,960		52,020		322,372		339,287		533,742		63,279
Total Loans, Gross	$	528,863	$	1,502,655	$	1,292,025	$	56,539	$	679,887	$	1,592,375	$	1,326,755	$	85,343


	As of December 31, 2021								As of December 31, 2022
	Due in One Year		More Than One		More Than Five		After		Due in One Year		More Than One		More Than Five		After
(dollars in thousands)	or Less		Year to Five Years		Year to Fifteen Years		Fifteen Years		or Less		Year to Five Years		Year to Fifteen Years		Fifteen Years
Commercial	$	143,878	$	149,541	$	63,588	$	3,162	$	137,657	$	197,363	$	97,259	$	3,065
Paycheck Protection Program		898		25,264		—		—		—		1,049		—		—
Construction and Land Development		88,814		121,357		71,303		—		96,702		125,996		66,156		6,700
1-4 Family Construction										54,469		10,510		5,263		—
Real Estate Mortgage:
1 - 4 Family Mortgage		55,794		185,729		63,117		677		54,499		214,434		85,880		661
Multifamily		78,875		331,447		470,353		29,568		157,585		454,880		642,029		52,244
CRE Owner Occupied		4,679		22,385		84,032		—		5,709		47,894		96,302		—
CRE Nonowner Occupied		146,508		359,735		312,326		—		120,645		471,656		354,707		—
Total Real Estate Mortgage Loans		285,856		899,296		929,828		30,245		338,438		1,188,864		1,178,918		52,905
Consumer and Other		3,088		2,645		495		214		4,921		2,988		—		223
Total Loans, Gross	$	522,534	$	1,198,103	$	1,065,214	$	33,621	$	632,187	$	1,526,770	$	1,347,596	$	62,893
Interest Rate Sensitivity:
Fixed Interest Rates	$	226,008	$	919,024	$	591,560	$	7,477	$	333,898	$	1,187,519	$	804,838	$	11,115
Floating or Adjustable Rates		296,526		279,079		473,654		26,144		298,289		339,251		542,758		51,778
Total Loans, Gross	$	522,534	$	1,198,103	$	1,065,214	$	33,621	$	632,187	$	1,526,770	$	1,347,596	$	62,893

Asset Quality

The Company emphasizes credit quality in the originating and monitoring of the loan portfolio, and success in underwriting is measured by the levels of classified and nonperforming assets and net charge-offs. Federal regulations and internal policies require the use of an asset classification system as a means of managing and reporting problem and potential problem assets. The Company has incorporated an internal asset classification system, substantially consistent with federal banking regulations, as a part of the credit monitoring system. Federal banking regulations set forth a classification scheme for problem and potential problem assets as “substandard,” “doubtful” or “loss” assets. An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. “Substandard” assets include those characterized by the “distinct possibility” that the financial institution will sustain “some loss” if the deficiencies are not corrected. Assets classified as “doubtful” have all

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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

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

The following table presents information on loan classifications at ~~September 30, 2022.~~March 31, 2023. The Company had no assets classified as doubtful or loss at ~~September 30, 2022.~~March 31, 2023.


	Risk Category						Risk Category
(dollars in thousands)	Watch		Substandard		Total		Watch		Substandard		Total
Commercial	$	5,439	$	10,273	$	15,712	$	5,057	$	18,461	$	23,518
Construction and Land Development		—		110		110		712		100		812
Real Estate Mortgage:
1 - 4 Family Mortgage		688		280		968		675		272		947
Multifamily								3,256		—		3,256
CRE Owner Occupied		—		1,667		1,667		—		1,604		1,604
CRE Nonowner Occupied		16,632		18,437		35,069		17,874		15,821		33,695
Total Real Estate Mortgage Loans		17,320		20,384		37,704		21,805		17,697		39,502
Totals	$	22,759	$	30,767	$	53,526	$	27,574	$	36,258	$	63,832

~~The Company has increased oversight and analysis of all segments of the loan portfolio in response to the COVID-19 pandemic and now economic uncertainty.~~ Loans that have potential weaknesses that warranted a watchlist risk rating at ~~September 30, 2022,~~March 31, 2023, totaled ~~$22.8~~$27.6 million, compared to ~~$49.3~~$32.3 million at December 31, ~~2021.~~2022. Loans that warranted a substandard risk rating at ~~September 30, 2022~~March 31, 2023 totaled ~~$30.8~~$36.3 million, compared to ~~$22.6~~$28.0 million at December 31, ~~2021.~~2022. The increase was primarily due to the downgrade of one loan relationship. Management continues to actively work with these borrowers and closely monitor substandard credits.

~~During the COVID-19 pandemic, the Company developed programs for clients who experienced business and personal disruptions by providing~~ ~~interest-only modifications and extended amortization modifications.~~ In accordance with interagency regulatory guidance and the CARES Act, qualifying loans modified in response to the COVID-19 pandemic are not considered TDRs. Modifications under this guidance, which could only be applied to modifications made by January 1, 2022, have been granted on a case-by-case basis based on specific needs and circumstances affecting each borrower. The Company had one modified loan totaling $10.6 million outstanding as of September 30, 2022, representing 0.3% of the loan portfolio, excluding PPP loans, which was down from $35.0 million at December 31, 2021.

~~The following table presents a rollforward of loan modification activity, by modification type, from December 31, 2021 to September 30, 2022:~~

(dollars in thousands)

Interest-Only

Extended Amortization

Total
Principal Balance - December 31, 2021

$
30,249

$
4,740

$
34,989
Modification Expired

(19,063)

(4,694)

(23,757)
Net Principal Advances (Payments)

(563)

(46)

(609)
Principal Balance - September 30, 2022

$
10,623

$
—

$
10,623

~~The following table presents a summary of active loan modifications, by loan segment and modification type, at September 30, 2022:~~

Interest-Only

Extended Amortization

Total
(dollars in thousands)

Amount

# of Loans

Amount

# of Loans

Amount

# of Loans
Real Estate Mortgage:

CRE Nonowner Occupied

$
1

10,623

$
—

—

1

10,623
Totals

$
1

10,623

$
-

-

$
1

10,623

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Nonperforming Assets

Nonperforming loans include loans accounted for on a nonaccrual basis and loans 90 days past due and still accruing. Nonperforming assets consist of nonperforming loans plus foreclosed assets (i.e., real or personal property acquired through foreclosure). Nonaccrual loans totaled ~~$663,000~~$693,000 at ~~September 30, 2022~~March 31, 2023 and ~~$722,000~~$639,000 at December 31, ~~2021, a decrease~~2022, an increase of ~~$59,000.~~$54,000. There were no loans 90 days past due and still accruing as of ~~September 30, 2022~~March 31, 2023 or December 31, ~~2021~~2022 and there were $116,000 foreclosed assets as of March 31, 2023 and no foreclosed assets as of ~~September 30, 2022 or~~ December 31, ~~2021.~~2022.

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


	September 30,			December 31,			March 31,			December 31,
(dollars in thousands)	2022			2021			2023			2022
Total Nonaccrual Loans	$	663		$	722		$	693		$	639
Total Nonperforming Loans	$	663		$	722		$	693		$	639
Plus: Foreclosed Assets		—			—			116			—
Total Nonperforming Assets ⁽¹⁾	$	663		$	722		$	809		$	639
Total Restructured Accruing Loans		83			1,304
Total Nonperforming Assets and Restructured Accruing Loans	$	746		$	2,026
Total Modified Accruing Loans⁽²⁾								9,773			82
Total Nonperforming Assets and Modified Accruing Loans ⁽²⁾							$	10,582		$	721
Nonaccrual Loans to Total Loans		0.02	%		0.03	%		0.02	%		0.02	%
Nonperforming Loans to Total Loans		0.02			0.03			0.02			0.02
Nonperforming Assets to Total Loans Plus Foreclosed Assets ⁽¹⁾		0.02			0.03			0.02			0.02

(1)	Nonperforming assets are defined as nonaccrual loans and loans greater than 90 days past due still accruing plus foreclosed assets. There were no loans greater than 90 days past due still accruing for any period shown.

(2)	Reflects the balance outstanding at March 31, 2023 of accruing modified loans to borrowers experiencing financial difficulty since adoption of ASU 2022-02. See “Note 1 – Description of the Business and Summary of Significant Accounting Policies” of the Company’s Consolidated

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Financial Statements included as part of this report for a discussion for this standard. Periods presented prior to that date reflect the outstanding balance of accruing troubled debt restructures as defined by superseded accounting guidance of ASC 310-40. Accruing loans are those where the Company expects to collect all amounts contractually due.

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~~credit losses on loans is recorded to reflect management’s estimate of any potential exposure or loss. Generally, payments received on nonaccrual loans are applied directly to principal. Gross income that would have been recorded on nonaccrual loans during the three ~~and nine~~ months ended ~~September 30,~~March 31, 2023 and 2022 was ~~$15,000~~$16,000 and ~~$37,000,~~$7,000, respectively.

Allowance for ~~Loan~~Credit Losses

The allowance for ~~loan~~credit losses on loans is a reserve established through charges to earnings in the form of a provision for ~~loan~~credit losses. The Company maintains an allowance for ~~loan~~credit losses at a level management considers adequate to provide for ~~known and probable incurred~~expected lifetime losses in the portfolio. The level of the allowance is based on management’s evaluation of estimated losses in the portfolio, after consideration of risk characteristics of the loans and prevailing and anticipated economic conditions. Loan charge-offs (i.e., loans judged to be uncollectible) are charged against the reserve and any subsequent recovery is credited to the reserve. The Company analyzes risks within the loan portfolio on a continual basis. A risk system, consisting of multiple grading categories for each portfolio class, is utilized as an analytical tool to assess risk and appropriate reserves. In addition to the risk system, management further evaluates risk characteristics of the loan portfolio under current and anticipated economic conditions, including the economic distress caused by the COVID-19 pandemic, rising inflation and the risk of recession, 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

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borrowers’ creditworthiness, and the impact of examinations by regulatory agencies all could cause changes to the allowance for ~~loan losses.~~credit losses on loans.

At ~~September 30, 2022,~~March 31, 2023, the allowance for ~~loan~~credit losses on loans was ~~$46.5~~$50.1 million, an increase of ~~$6.5~~$2.2 million from ~~$40.0~~$48.0 million at December 31, ~~2021.~~2022. Net charge-offs (recoveries) totaled ($~~280,000)~~2,000) during the ~~third~~first quarter of ~~2022~~2023 and ~~($10,000)~~$3,000 during the ~~third~~first quarter of ~~2021. Net charge-offs (recoveries) totaled ($271,000) for the nine months ended September 30, 2022 and ($60,000) for the nine months ended September 30, 2021.~~2022. The allowance for ~~loan~~credit losses on loans as a percentage of total loans was ~~1.38%~~1.36% at ~~September 30, 2022,~~March 31, 2023, compared to ~~1.42%~~1.34% at December 31, ~~2021.~~2022.

The following table presents a summary of net charge-offs for the periods indicated:


	Three Months Ended						Nine Months Ended						Three Months Ended
	September 30,						September 30,						March 31,
(dollars in thousands)	2022			2021			2022			2021			2023			2022
Net Charge-offs (Recoveries)
Commercial	$	(3)		$	(6)		$	6		$	(28)		$	(3)		$	(2)
Real Estate Mortgage:
1 - 4 Family Mortgage		(281)			(18)			(286)			(18)			(1)			(3)
CRE Owner Occupied		—			—			—			(32)
Total Real Estate Mortgage Loans		(281)			(18)			(286)			(50)			(1)			(3)
Consumer and Other		4			14			9			18			2			8
Total Net Charge-offs (Recoveries)	$	(280)		$	(10)		$	(271)		$	(60)		$	(2)		$	3
Net Charge-offs to Average Loans
Commercial		0.00	%		(0.01)	%		0.00	%		(0.01)	%		0.00	%		0.00	%
Real Estate Mortgage:
1 - 4 Family Mortgage		(0.33)			(0.02)			(0.12)			(0.01)			0.00			0.00
CRE Owner Occupied		0.00			0.00			0.00			(0.05)
Total Real Estate Mortgage Loans		(0.04)			0.00			(0.02)			0.00			0.00			0.00
Consumer and Other		0.22			0.77			0.16			0.32			0.09			0.42
Total Net Charge-offs (Recoveries) (Annualized) to Average Loans		(0.03)	%		0.00	%		(0.01)	%		0.00	%		0.00	%		0.00	%
Gross Loans, End of Period	$	3,380,082		$	2,712,012		$	3,380,082		$	2,712,012		$	3,684,360		$	2,987,967
Average Loans		3,265,814			2,655,027			3,092,499			2,527,310			3,630,446			2,899,985
Allowance to Total Gross Loans		1.38	%		1.43	%		1.38	%		1.43	%		1.36	%		1.40	%
Allowance to Total Gross Loans, Excluding PPP Loans		1.38			1.46			1.38			1.46

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The following table presents a summary of the allocation of the allowance for ~~loan~~credit losses on loans by loan portfolio segment as of the dates indicated:


	September 30,				December 31,				March 31,				December 31,
	2022				2021				2023				2022
(dollars in thousands)	Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent
Commercial	$	6,348	13.7	%	$	6,256	15.6	%	$	5,566	11.1	%	$	6,500	13.5	%
Paycheck Protection Program		1	—			13	—			—	—			1	—
Construction and Land Development		4,469	9.6			3,757	9.4			3,169	6.3			3,911	8.1
1-4 Family Construction										806	1.6			845	1.8
Real Estate Mortgage:
1 - 4 Family Mortgage		4,230	9.1			3,757	9.4			2,717	5.4			4,325	9.0
Multifamily		16,822	36.2			12,610	31.5			20,989	41.8			17,459	36.4
CRE Owner Occupied		2,027	4.4			1,495	3.7			1,083	2.2			1,965	4.1
CRE Nonowner Occupied		12,282	26.4			11,335	28.3			15,744	31.4			12,576	26.2
Total Real Estate Mortgage Loans		35,361	76.1			29,197	72.9			40,533	80.8			36,325	75.7
Consumer and Other		163	0.4			147	0.5			74	0.2			151	0.3
Unallocated		149	0.3			650	1.6			—	—			263	0.6
Total Allowance for Loan Losses	$	46,491	100.0	%	$	40,020	100.0	%
Total Allowance for Credit Losses									$	50,148	100.0	%	$	47,996	100.0	%

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 presents the dollar and percentage composition of the deposit portfolio, by category, at the dates indicated:


	September 30, 2022				March 31, 2021				March 31, 2021				December 31, 2021				September 30, 2021				March 31, 2023				December 31, 2022				September 30, 2022				June 30, 2022				March 31, 2022
(dollars in thousands)	Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent
Noninterest Bearing Transaction Deposits	$	961,084	29.1	%	$	961,998	30.0	%	$	835,482	27.5	%	$	875,084	29.7	%	$	846,490	29.7	%	$	742,198	21.8	%	$	884,272	25.9	%	$	961,084	29.1	%	$	961,998	30.0	%	$	835,482	27.5	%
Interest Bearing Transaction Deposits		510,396	15.4			522,151	17.1			598,402	19.7			544,789	18.5			488,785	17.1			630,037	18.4			451,992	13.2			510,396	15.4			522,151	17.1			598,402	19.7
Savings and Money Market Deposits		1,077,333	32.6			952,138	29.0			890,926	29.3			863,567	29.3			791,861	27.7			913,013	26.8			1,031,873	30.2			1,077,333	32.6			952,138	29.0			890,926	29.3
Time Deposits		293,052	8.9			272,424	8.5	��		286,674	9.5			293,474	10.0			309,824	10.9			266,213	7.8			272,253	8.0			293,052	8.9			272,424	8.5			286,674	9.5
Brokered Deposits		463,209	14.0			493,242	15.4			424,127	14.0			369,323	12.5			417,197	14.6			859,662	25.2			776,153	22.7			463,209	14.0			493,242	15.4			424,127	14.0
Total Deposits	$	3,305,074	100.0	%	$	3,201,953	100.0	%	$	3,035,611	100.0	%	$	2,946,237	100.0	%	$	2,854,157	100.0	%	$	3,411,123	100.0	%	$	3,416,543	100.0	%	$	3,305,074	100.0	%	$	3,201,953	100.0	%	$	3,035,611	100.0	%

Total deposits at ~~September 30, 2022~~March 31, 2023 were ~~$3.31~~$3.41 billion, ~~an increase~~a decrease of ~~$358.8~~$5.4 million, or ~~12.2%~~0.2%, compared to total deposits of ~~$2.95~~$3.42 billion at December 31, ~~2021,~~2022, and an increase of ~~$450.9~~$375.5 million, or ~~15.8%~~12.4%, over total deposits of ~~$2.85~~$3.04 billion at ~~September 30, 2021. Deposit growth~~March 31, 2022. Deposits decreased slightly in the ~~third~~first quarter of ~~2022 was~~2023 primarily due to ~~an increase~~a decrease in noninterest bearing deposits and savings and money market deposits, ~~and time deposits,~~ offset ~~partially~~ by ~~declines~~an increase in interest bearing transaction deposits and brokered deposits. ~~In addition to continued growth of core deposits,~~The Company uses brokered deposits ~~were also being used~~ as a supplemental funding source, as needed, ~~for~~to support the ~~robust~~ loan portfolio growth. ~~Given the rapid rise in interest rates and the prospect for more, management believes~~Uninsured deposits ~~could experience fluctuations in future periods.~~as of March 31, 2023 were 24% of total deposits, down from 38% as of December 31, 2022.

The Company relies on increasing the deposit base to fund loans and other asset growth. The Company is in a highly competitive market and competes for local deposits by offering attractive products with competitive rates. The Company expects to have a higher average cost of funds for local deposits compared to competitor banks due to the lack of an extensive branch network. The Company’s strategy is to offset the higher cost of funding with a lower level of operating expense. When appropriate, the Company utilizes alternative funding sources such as brokered deposits. The brokered deposit market provides flexibility in structure, optionality and efficiency not afforded in traditional retail deposit channels. At ~~September 30, 2022,~~March 31, 2023, total brokered deposits were ~~$463.2~~$859.7 million, an increase of ~~$93.9~~$83.5 million, or ~~25.4%~~10.8%, compared to total brokered deposits of ~~$369.3~~$776.2 million at December 31, ~~2021.~~2022.

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The following table presents the average balance and average rate paid on each of the following deposit categories as of and for the three months ended ~~September 30, 2022~~March 31, 2023 and ~~2021:~~2022:


	As of and for the				As of and for the				As of and for the				As of and for the
	Three Months Ended				Three Months Ended				Three Months Ended				Three Months Ended
	September 30, 2022				September 30, 2021				March 31, 2023				March 31, 2022
	Average		Average		Average		Average		Average		Average		Average		Average
(dollars in thousands)	Balance		Rate		Balance		Rate		Balance		Rate		Balance		Rate
Noninterest Bearing Transaction Deposits	$	991,545	—	%	$	784,148	—	%	$	813,598	—	%	$	822,488	—	%
Interest Bearing Transaction Deposits		517,658	0.79			479,580	0.47			461,372	2.44			566,279	0.43
Savings and Money Market Deposits		999,932	0.99			801,354	0.45			1,044,794	2.52			876,580	0.42
Time Deposits < $250,000		209,200	0.95			256,160	1.14			179,168	1.61			234,684	1.02
Time Deposits > $250,000		79,421	1.74			62,062	1.22			69,006	2.10			54,230	1.17
Brokered Deposits		447,034	1.43			440,167	0.92			743,465	3.29			406,648	0.90
Total Deposits	$	3,244,790	0.73	%	$	2,823,471	0.48	%	$	3,311,403	2.01	%	$	2,960,909	0.43	%

The Company’s total uninsured deposits, which are the amounts of deposit accounts that exceed the FDIC insurance limit, currently $250,000, were approximately ~~$1.40 billion~~$818.4 million and ~~$1.21~~$1.32 billion at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, respectively. These amounts were estimated based on the same methodologies and assumptions used for regulatory reporting purposes.

Borrowed Funds

Federal Funds Purchased

In addition to deposits, the Company utilizes overnight borrowings to meet the daily liquidity needs as a supplemental funding source for loan growth. The Company had $437.0 million and $287.0 million federal funds purchased as of March 31, 2023 and December 31, 2022, respectively.

Other Borrowings

At ~~September 30, 2022,~~March 31, 2023, other borrowings outstanding consisted of FHLB advances of ~~$71.5 million.~~$197.0 million, compared to $97.0 million at December 31, 2022. 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 ~~$426.6~~$246.8 million and ~~$550.8~~$390.9 million at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, respectively.

The Company has an outstanding Loan and Security Agreement and revolving note with a third party correspondent lender, which is secured by 100% of the issued and outstanding stock of the Bank. On September 1, 2022, the Company entered into a second amendment to the agreement which increased the maximum principal amount of the Company’s revolving line of credit from $25.0 million to $40.0 million and extended the maturity date from February 28, 2023 to September 1, 2024. As of ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021, there were no~~2022, the Company had $13.8 million of outstanding balances under the revolving line of credit.

Additionally, the Company has borrowing capacity from other sources. As of ~~September 30, 2022,~~March 31, 2023, the Bank was eligible to use the Federal Reserve discount window for borrowings. Based on assets pledged as collateral as of the applicable date, the Bank’s borrowing availability was approximately ~~$156.5~~$990.7 million and ~~$126.0~~$157.8 million at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, respectively. As of ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, the Company had no outstanding advances from the discount window.

Subordinated Debentures

For additional information, see “Note 8 – Subordinated Debentures” of the Company’s Consolidated Financial Statements included as part of this report.

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Contractual Obligations

The following table presents supplemental information regarding total contractual obligations at ~~September 30, 2022:~~March 31, 2023:


	Within		One to		Three to		After				Within		One to		Three to		After
(dollars in thousands)	One Year		Three Years		Five Years		Five Years		Total		One Year		Three Years		Five Years		Five Years		Total
Deposits Without a Stated Maturity	$	2,744,476	$	—	$	—	$	—	$	2,744,476	$	2,460,671	$	—	$	—	$	—	$	2,460,671
Time Deposits		222,981		217,500		103,117		17,000		560,598		340,742		483,876		125,076		758		950,452
Federal Funds Purchased												437,000		—		—		—		437,000
Notes Payable												—		13,750		—		—		13,750
FHLB Advances		55,000		12,500		4,000		—		71,500		115,500		57,500		24,000		—		197,000
Subordinated Debentures		—		—		13,750		80,000		93,750		—		—		—		80,000		80,000
Commitment to Fund Tax Credit Investments		323		—		—		—		323		6,926		—		—		—		6,926
Operating Lease Obligations		513		1,010		670		370		2,563		527		1,060		628		253		2,468
Totals	$	3,023,293	$	231,010	$	121,537	$	97,370	$	3,473,210	$	3,361,366	$	556,186	$	149,704	$	81,011	$	4,148,267

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

Capital

Total shareholders’ equity at ~~September 30, 2022~~March 31, 2023 was ~~$382.0~~$402.0 million, an increase of ~~$2.7~~$7.9 million compared to total shareholders’ equity of ~~$379.3~~$394.1 million at December 31, ~~2021, primarily~~2022. The increase was due to net income retained, ~~and unrealized gains in the derivatives portfolio,~~ offset partially by ~~an increase in unrealized losses in~~ the ~~securities portfolio~~Day 1 impact of adopting CECL and preferred stock ~~repurchases made under the Company’s stock repurchase program.~~dividends.

Stock Repurchase Program. During the three months ended September 30, 2022, the Company repurchased 99,310 shares of its common stock, representing 0.4% of the Company’s outstanding shares. Shares were repurchased during this period at a weighted average price of $16.27 per share, for a total of $1.6 million. During the nine months ended September 30, 2022, the Company repurchased 662,765 shares of its common stock, representing 2.4% of the Company’s outstanding shares. Shares were repurchased during this period at a weighted average price of $16.26 per share, for a total of $10.8 million. All shares repurchased under the stock repurchase program were converted to authorized but unissued shares.

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.

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Management believes the Company and the Bank met all capital adequacy requirements to which they were subject as of ~~September 30, 2022.~~March 31, 2023. 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

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framework are set forth in the following tables. The Company’s and the Bank’s actual capital amounts and ratios were as of the dates indicated:


					Minimum Required				For Capital Adequacy				To be Well Capitalized								Minimum Required				For Capital Adequacy				To be Well Capitalized
					For Capital Adequacy				Purposes Plus Capital				Under Prompt Corrective								For Capital Adequacy				Purposes Plus Capital				Under Prompt Corrective
	Actual				Purposes				Conservation Buffer				Action Regulations				Actual				Purposes				Conservation Buffer				Action Regulations
(dollars in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio
September 30, 2022
March 31, 2023
Company (Consolidated):
Total Risk-based Capital	$	535,184	13.78	%	$	310,810	8.00	%	$	407,939	10.50	%		N/A	N/A		$	547,764	13.25	%	$	330,826	8.00	%	$	434,210	10.50	%		N/A	N/A
Tier 1 Risk-based Capital		395,765	10.19			233,108	6.00			330,236	8.50			N/A	N/A			417,037	10.08			248,120	6.00			351,503	8.50			N/A	N/A
Common Equity Tier 1 Capital		329,251	8.47			174,831	4.50			271,959	7.00			N/A	N/A			350,523	8.48			186,090	4.50			289,473	7.00			N/A	N/A
Tier 1 Leverage Ratio		395,765	9.98			158,647	4.00			158,647	4.00			N/A	N/A			417,037	9.41			177,320	4.00			177,320	4.00			N/A	N/A
Bank:
Total Risk-based Capital	$	491,982	12.67	%	$	310,689	8.00	%	$	407,779	10.50	%	$	388,361	10.00	%	$	521,610	12.62	%	$	330,694	8.00	%	$	434,036	10.50	%	$	413,368	10.00	%
Tier 1 Risk-based Capital		445,131	11.46			233,017	6.00			330,107	8.50			310,689	8.00			469,904	11.37			248,021	6.00			351,363	8.50			330,694	8.00
Common Equity Tier 1 Capital		445,131	11.46			174,762	4.50			271,853	7.00			252,435	6.50			469,904	11.37			186,015	4.50			289,357	7.00			268,689	6.50
Tier 1 Leverage Ratio		445,131	11.24			158,453	4.00			158,453	4.00			198,067	5.00			469,904	10.61			177,094	4.00			177,094	4.00			221,368	5.00


					Minimum Required				For Capital Adequacy				To be Well Capitalized								Minimum Required				For Capital Adequacy				To be Well Capitalized
					For Capital Adequacy				Purposes Plus Capital				Under Prompt Corrective								For Capital Adequacy				Purposes Plus Capital				Under Prompt Corrective
	Actual				Purposes				Conservation Buffer				Action Regulations				Actual				Purposes				Conservation Buffer				Action Regulations
(dollars in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio
December 31, 2021
December 31, 2022
Company (Consolidated):
Total Risk-based Capital	$	499,554	15.55	%	$	256,966	8.00	%	$	337,268	10.50	%		N/A	N/A		$	536,352	13.15	%	$	326,190	8.00	%	$	428,125	10.50	%		N/A	N/A
Tier 1 Risk-based Capital		367,161	11.43			192,725	6.00			273,027	8.50			N/A	N/A			409,092	10.03			244,643	6.00			346,577	8.50			N/A	N/A
Common Equity Tier 1 Capital		300,647	9.36			144,543	4.50			224,845	7.00			N/A	N/A			342,578	8.40			183,482	4.50			285,417	7.00			N/A	N/A
Tier 1 Leverage Ratio		367,161	10.82			135,723	4.00			135,723	4.00			N/A	N/A			409,092	9.55			171,368	4.00			171,368	4.00			N/A	N/A
Bank:
Total Risk-based Capital	$	415,848	12.94	%	$	257,005	8.00	%	$	337,319	10.50	%	$	321,256	10.00	%	$	508,760	12.47	%	$	326,288	8.00	%	$	428,253	10.50	%	$	407,860	10.00	%
Tier 1 Risk-based Capital		375,688	11.69			192,754	6.00			273,068	8.50			257,005	8.00			460,404	11.29			244,716	6.00			346,681	8.50			326,288	8.00
Common Equity Tier 1 Capital		375,688	11.69			144,565	4.50			224,879	7.00			208,816	6.50			460,404	11.29			183,537	4.50			285,502	7.00			265,109	6.50
Tier 1 Leverage Ratio		375,688	11.09			135,508	4.00			135,508	4.00			169,386	5.00			460,404	10.76			171,113	4.00			171,113	4.00			213,891	5.00

Regulations include a capital conservation buffer of 2.5% that was added to the minimum requirements for capital adequacy purposes. A banking organization with a conservation buffer of less than the required amount is subject to limitations on capital distributions, including dividend payments, stock repurchases and certain discretionary bonus payments to executive officers. At ~~September 30, 2022,~~March 31, 2023, the ratios for the Company and the Bank were sufficient to meet the conservation buffer.

Off-Balance Sheet Arrangements

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

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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

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commitments by subjecting them to credit approval and monitoring procedures. The Company assesses the credit risk associated with certain commitments to extend credit and establishes a liability for probable credit losses.

The following table presents credit arrangements and financial instruments whose contract amounts represent credit risk as of ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021:~~2022:


	September 30, 2022				December 31, 2021				March 31, 2023				December 31, 2022
	Fixed		Variable		Fixed		Variable		Fixed		Variable		Fixed		Variable
(dollars in thousands)
Unfunded Commitments Under Lines of Credit	$	412,703	$	425,005	$	335,842	$	463,306	$	331,954	$	377,259	$	444,669	$	404,065
Letters of Credit		16,171		106,267		10,521		109,126		20,924		102,101		20,658		95,111
Totals	$	428,874	$	531,272	$	346,363	$	572,432	$	352,878	$	479,360	$	465,327	$	499,176

Liquidity

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

The Company manages liquidity by maintaining adequate levels of cash and other assets from on- and off-balance sheet arrangements. Specifically, on-balance sheet liquidity consists of cash and due from banks and unpledged investment securities available for sale, which are referred to as primary liquidity. In regards to off-balance sheet capacity, the Company maintains available borrowing capacity under secured borrowing lines with the FHLB, the Federal Reserve Bank of Minneapolis, and a correspondent lender, as well as unsecured lines of credit for the purpose of overnight funds with various correspondent banks, which the Company refers to as secondary liquidity.

In addition, the Bank is a member of the American Financial Exchange, or AFX, through which it may either borrow or lend funds on an overnight or short-term basis with a group of approved commercial banks. The availability of funds changes daily. As of ~~September 30, 2022,~~March 31, 2023, the Company had no borrowings outstanding through the AFX.

Total on- and off-balance sheet liquidity was $1.92 billion as of March 31, 2023, compared to $1.38 billion at December 31, 2022. During the first quarter of 2023, the Company took various actions to increase its total liquidity by more than $500 million, including pledging loans and securities to create additional borrowing capacity at the Federal Reserve Bank and increasing its cash on the balance sheet. The Company did not utilize the Bank Term Funding Program (BTFP) or Federal Reserve Discount Window during the first quarter of 2023.

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


Primary Liquidity—On-Balance Sheet	September 30, 2022			December 31, 2021			March 31, 2023			December 31, 2022
(dollars in thousands)
Cash and Cash Equivalents	$	36,332		$	130,884		$	177,116		$	48,090
Securities Available for Sale		542,007			439,362			559,430			548,613
Less: Pledged Securities								(234,452)			—
Total Primary Liquidity	$	578,339		$	570,246		$	502,094		$	596,703
Ratio of Primary Liquidity to Total Deposits		17.5	%		19.4	%		14.7	%		17.5	%


Secondary Liquidity—Off-Balance Sheet
Borrowing Capacity	September 30, 2022			December 31, 2021			March 31, 2023			December 31, 2022
(dollars in thousands)
Net Secured Borrowing Capacity with the FHLB	$	426,604		$	550,807		$	246,795		$	390,898
Net Secured Borrowing Capacity with the Federal Reserve Bank		156,534			126,043			990,685			157,827
Unsecured Borrowing Capacity with Correspondent Lenders		208,000			208,000			158,000			208,000
Secured Borrowing Capacity with Correspondent Lender		40,000			25,000			26,250			26,250
Total Secondary Liquidity	$	831,138		$	909,850		$	1,421,730		$	782,975
Ratio of Primary and Secondary Liquidity to Total Deposits		42.6	%		50.2	%		56.4	%		40.4	%

During the ~~nine~~three months ended ~~September 30, 2022,~~March 31, 2023, primary liquidity ~~increased~~decreased by ~~$8.1~~$94.6 million due to ~~a $102.6~~pledging $234.5 million ~~increase in~~of securities, ~~available for sale,~~partially offset ~~partially~~ by ~~a $94.6 million decrease~~an increase in cash and cash equivalents,

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when compared to December 31, ~~2021.~~2022. Secondary liquidity ~~decreased~~increased by ~~$78.1~~$638.8 million as of ~~September 30, 2022,~~March 31, 2023, when compared to December 31, ~~2021,~~2022, due to an $832.9 million increase in the borrowing capacity with the Federal Reserve Bank, offset partially by a ~~$124.2~~$144.1 million decrease in the borrowing capacity with ~~FHLB, offset partially by a $30.5 million increase on~~ the ~~secured credit line with the Federal Reserve Bank~~FHLB and a ~~$15.0~~$50.0 million ~~increase~~decrease in the ~~secured~~unsecured borrowing capacity with a correspondent lender.

In addition to primary liquidity, the Company generates liquidity from cash flows from the loan and securities portfolios and from the large base of core customer deposits, defined as noninterest bearing transaction, interest bearing transaction, savings, non-brokered money market accounts and non-brokered time deposits less than $250,000. At ~~September 30, 2022,~~March 31, 2023, core deposits totaled approximately ~~$2.74~~$2.47 billion and represented ~~83.0%~~72.4% of total deposits. These core deposits are normally less volatile, often with customer relationships tied to other products offered by the Company, which promote long-standing relationships and stable funding sources.

The Company uses brokered deposits, the availability of which is uncertain and subject to competitive market forces and regulation, for liquidity and interest rate risk management purposes. At ~~September 30, 2022,~~March 31, 2023, brokered deposits totaled ~~$463.2~~$859.7 million, consisting of ~~$267.5~~$684.2 million of brokered time deposits and ~~$195.7~~$175.4 million of non-maturity brokered money market and transaction accounts. At December 31, ~~2021,~~2022, brokered deposits totaled ~~$369.3~~$776.2 million, consisting of ~~$238.1~~$591.9 million of brokered time deposits and ~~$131.2~~$184.3 million of non-maturity brokered money market and transaction accounts.

The Company’s liquidity policy includes guidelines for On-Balance Sheet Liquidity (a measurement of primary liquidity to total deposits plus borrowings), Total On-Balance Sheet Liquidity with Borrowing Capacity (a measurement of primary and secondary liquidity to total deposits plus borrowings), Wholesale Funding Ratio (a measurement of total wholesale funding to total deposits plus borrowings), and other guidelines developed for measuring and maintaining liquidity. ~~As of September 30, 2022, the Company was in compliance with all established liquidity guidelines in the policy.~~

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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~~.tables.


	For the Three Months Ended															For the Nine Months Ended						For the Three Months Ended
	September 30,			June 30,			March 31,			December 31,			September 30,			September 30,			September 30,			March 31,			December 31,			September 30,			June 30,			March 31,
(dollars in thousands)	2022			2022			2022			2021			2021			2022			2021			2023			2022			2022			2022			2022

Pre-Provision Net Revenue
Noninterest Income	$	1,387		$	1,650		$	1,557		$	1,288		$	1,410		$	4,594		$	4,021		$	1,943		$	1,738		$	1,387		$	1,650		$	1,557
Less: Gain on sales of Securities		—			(52)			—			—			(48)			(52)			(750)
Less: (Gain) Loss on Sales of Securities																							56			(30)			—			(52)			—
Less: FHLB Advance Prepayment Income																							(299)			—			—			—			—
Total Operating Noninterest Income		1,387			1,598			1,557			1,288			1,362			4,542			3,271			1,700			1,708			1,387			1,598			1,557
Plus: Net Interest Income		34,095			32,530			30,180			29,153			28,673			96,805			80,356			28,567			32,893			34,095			32,530			30,180
Net Operating Revenue	$	35,482		$	34,128		$	31,737		$	30,441		$	30,035		$	101,347		$	83,627		$	30,267		$	34,601		$	35,482		$	34,128		$	31,737

Noninterest Expense	$	14,157		$	13,752		$	13,508		$	12,459		$	13,236		$	41,417		$	35,636		$	14,183		$	15,203		$	14,157		$	13,752		$	13,508
Less: Amortization of Tax Credit Investments		(114)			(63)			(117)			(152)			(152)			(294)			(410)			(114)			(114)			(114)			(63)			(117)
Less: Debt Prepayment Fees		—			—			—			—			(582)			—			(582)
Total Operating Noninterest Expense	$	14,043		$	13,689		$	13,391		$	12,307		$	12,502		$	41,123		$	34,644		$	14,069		$	15,089		$	14,043		$	13,689		$	13,391

Pre-Provision Net Revenue	$	21,439		$	20,439		$	18,346		$	18,134		$	17,533		$	60,224		$	48,983		$	16,198		$	19,512		$	21,439		$	20,439		$	18,346

Plus:
Non-Operating Revenue Adjustments		—			52			—			—			48			52			750			243			30			—			52			—
Less:
Provision for Loan Losses		1,500			3,025			1,675			1,150			1,300			6,200			4,000			625			1,500			1,500			3,025			1,675
Non-Operating Expense Adjustments		114			63			117			152			734			294			992			114			114			114			63			117
Provision for Income Taxes		5,312			4,521			4,292			4,318			4,038			14,125			11,568			4,060			4,193			5,312			4,521			4,292
Net Income	$	14,513		$	12,882		$	12,262		$	12,514		$	11,509		$	39,657		$	33,173		$	11,642		$	13,735		$	14,513		$	12,882		$	12,262

Average Assets	$	3,948,201		$	3,743,575		$	3,513,798		$	3,403,270		$	3,332,301		$	3,736,783		$	3,117,861		$	4,405,234		$	4,251,345		$	3,948,201		$	3,743,575		$	3,513,798
Pre-Provision Net Revenue Return on Average Assets		2.15	%		2.19	%		2.12	%		2.11	%		2.09	%		2.15	%		2.10	%		1.49	%		1.82	%		2.15	%		2.19	%		2.12	%


	For the Three Months Ended																For the Nine Months Ended					For the Three Months Ended
	September 30,			June 30,			March 31,			December 31,			September 30,				September 30,			September 30,		March 31,			December 31,			September 30,			June 30,			March 31,
(dollars in thousands)	2022			2022			2022			2021			2021				2022			2021		2023			2022			2022			2022			2022

Core Net Interest Margin
Net Interest Income (Tax-equivalent Basis)	$	34,417		$	32,806		$	30,438		$	29,388		$	28,880		$	97,661		$	80,985		$	28,947		$	33,260		$	34,417		$	32,806		$	30,438
Less: Loan Fees		(1,400)			(2,030)			(1,743)			(1,462)			(1,487)			(5,173)			(3,712)			(998)			(1,100)			(1,400)			(2,030)			(1,743)
Less: PPP Interest and Fees		(96)			(263)			(563)			(1,057)			(1,753)			(922)			(5,384)			(2)			(48)			(96)			(263)			(563)
Core Net Interest Income	$	32,921		$	30,513		$	28,132		$	26,869		$	25,640		$	91,566		$	71,889		$	27,947		$	32,112		$	32,921		$	30,513		$	28,132

Average Interest Earning Assets		3,871,896			3,671,748			3,430,774			3,320,603			3,234,301			3,659,755			3,046,893			4,323,706			4,177,644			3,871,896			3,671,748			3,430,774
Less: Average PPP Loans		(2,424)			(8,335)			(18,140)			(39,900)			(76,006)			(9,575)			(124,466)			(999)			(1,109)			(2,424)			(8,335)			(18,140)
Core Average Interest Earning Assets	$	3,869,472		$	3,663,413		$	3,412,634		$	3,280,703		$	3,158,295		$	3,650,180		$	2,922,427		$	4,322,707		$	4,176,535		$	3,869,472		$	3,663,413		$	3,412,634
Core Net Interest Margin		3.38	%		3.34	%		3.34	%		3.25	%		3.22	%		3.35	%		3.29	%		2.62	%		3.05	%		3.38	%		3.34	%		3.34	%

6062

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	For the Three Months Ended															For the Nine Months Ended						For the Three Months Ended
	September 30,			June 30,			March 31,			December 31,			September 30,			September 30,			September 30,			March 31,			December 31,			September 30,			June 30,			March 31,
(dollars in thousands)	2022			2022			2022			2021			2021			2022			2021			2023			2022			2022			2022			2022

Efficiency Ratio
Noninterest Expense	$	14,157		$	13,752		$	13,508		$	12,459		$	13,236		$	41,417		$	35,636		$	14,183		$	15,203		$	14,157		$	13,752		$	13,508
Less: Amortization of Intangible Assets		(48)			(47)			(48)			(48)			(48)			(143)			(143)			(48)			(48)			(48)			(47)			(48)
Adjusted Noninterest Expense	$	14,109		$	13,705		$	13,460		$	12,411		$	13,188		$	41,274		$	35,493		$	14,135		$	15,155		$	14,109		$	13,705		$	13,460
Net Interest Income		34,095			32,530			30,180			29,153			28,673			96,805			80,356			28,567			32,893			34,095			32,530			30,180
Noninterest Income		1,387			1,650			1,557			1,288			1,410			4,594			4,021			1,943			1,738			1,387			1,650			1,557
Less: Gain on Sales of Securities		—			(52)			—			—			(48)			(52)			(750)			56			(30)			—			(52)			—
Adjusted Operating Revenue	$	35,482		$	34,128		$	31,737		$	30,441		$	30,035		$	101,347		$	83,627		$	30,566		$	34,601		$	35,482		$	34,128		$	31,737
Efficiency Ratio		39.8	%		40.2	%		42.4	%		40.8	%		43.9	%		40.7	%		42.4	%		46.2	%		43.8	%		39.8	%		40.2	%		42.4	%

Adjusted Efficiency Ratio
Noninterest Expense	$	14,157		$	13,752		$	13,508		$	12,459		$	13,236		$	41,417		$	35,636		$	14,183		$	15,203		$	14,157		$	13,752		$	13,508
Less: Amortization of Tax Credit Investments		(114)			(63)			(117)			(152)			(152)			(294)			(410)			(114)			(114)			(114)			(63)			(117)
Less: Debt Prepayment Fees		—			—			—			—			(582)			—			(582)
Less: Amortization of Intangible Assets		(48)			(47)			(48)			(48)			(48)			(143)			(143)			(48)			(48)			(48)			(47)			(48)
Adjusted Noninterest Expense	$	13,995		$	13,642		$	13,343		$	12,259		$	12,454		$	40,980		$	34,501		$	14,021		$	15,041		$	13,995		$	13,642		$	13,343
Net Interest Income		34,095			32,530			30,180			29,153			28,673			96,805			80,356			28,567			32,893			34,095			32,530			30,180
Noninterest Income		1,387			1,650			1,557			1,288			1,410			4,594			4,021			1,943			1,738			1,387			1,650			1,557
Less: Gain on Sales of Securities		—			(52)			—			—			(48)			(52)			(750)
Less: FHLB Advance Prepayment Income																							(299)			—			—			—			—
Less: (Gain) Loss on Sales of Securities																							56			(30)			—			(52)			—
Adjusted Operating Revenue	$	35,482		$	34,128		$	31,737		$	30,441		$	30,035		$	101,347		$	83,627		$	30,267		$	34,601		$	35,482		$	34,128		$	31,737
Adjusted Efficiency Ratio		39.4	%		40.0	%		42.0	%		40.3	%		41.5	%		40.4	%		41.3	%		46.3	%		43.5	%		39.4	%		40.0	%		42.0	%


	For the Three Months Ended
	March 31,			December 31,			September 30,			June 30,			March 31,
(dollars in thousands)	2023			2022			2022			2022			2022

Tangible Common Equity and Tangible Common Equity/Tangible Assets
Total Shareholders' Equity	$	402,006		$	394,064		$	382,007		$	374,883		$	379,441
Less: Preferred Stock		(66,514)			(66,514)			(66,514)			(66,514)			(66,514)
Total Common Shareholders' Equity		335,492			327,550			315,493			308,369			312,927
Less: Intangible Assets		(2,866)			(2,914)			(2,962)			(3,009)			(3,057)
Tangible Common Equity	$	332,626		$	324,636		$	312,531		$	305,360		$	309,870

Total Assets	$	4,602,899		$	4,345,662		$	4,128,987		$	3,883,264		$	3,607,920
Less: Intangible Assets		(2,866)			(2,914)			(2,962)			(3,009)			(3,057)
Tangible Assets	$	4,600,033		$	4,342,748		$	4,126,025		$	3,880,255		$	3,604,863
Tangible Common Equity/Tangible Assets		7.23	%		7.48	%		7.57	%		7.87	%		8.60	%

Tangible Book Value Per Share
Book Value Per Common Share	$	12.05		$	11.80		$	11.44		$	11.14		$	11.12
Less: Effects of Intangible Assets		(0.10)			(0.11)			(0.11)			(0.11)			(0.11)
Tangible Book Value Per Common Share	$	11.95		$	11.69		$	11.33		$	11.03		$	11.01

Return on Average Tangible Common Equity
Net Income Available to Common Shareholders	$	10,629		$	12,721		$	13,500		$	11,868		$	11,249

Average Shareholders' Equity	$	403,533		$	387,589		$	384,020		$	381,448		$	383,024
Less: Average Preferred Stock		(66,514)			(66,514)			(66,514)			(66,514)			(66,514)
Average Common Equity		337,019			321,075			317,506			314,934			316,510
Less: Effects of Average Intangible Assets		(2,894)			(2,941)			(2,989)			(3,037)			(3,084)
Average Tangible Common Equity	$	334,125		$	318,134		$	314,517		$	311,897		$	313,426
Return on Average Tangible Common Equity		12.90	%		15.86	%		17.03	%		15.26	%		14.56	%

6163

Table of Contents

For the Three Months Ended

For the Nine Months Ended

September 30,

June 30,

March 31,

December 31,

September 30,

September 30,

September 30,
(dollars in thousands)

2022

2022

2022

2021

2021

2022

2021

Tangible Common Equity and Tangible Common Equity/Tangible Assets

Total Shareholders' Equity

$
382,007

$
374,883

$
379,441

$
379,272

$
367,803

Less: Preferred Stock

(66,514)

(66,514)

(66,514)

(66,514)

(66,515)

Total Common Shareholders' Equity

315,493

308,369

312,927

312,758

301,288

Less: Intangible Assets

(2,962)

(3,009)

(3,057)

(3,105)

(3,153)

Tangible Common Equity

$
312,531

$
305,360

$
309,870

$
309,653

$
298,135

Total Assets

$
4,128,987

$
3,883,264

$
3,607,920

$
3,477,659

$
3,389,125

Less: Intangible Assets

(2,962)

(3,009)

(3,057)

(3,105)

(3,153)

��

Tangible Assets

$
4,126,025

$
3,880,255

$
3,604,863

$
3,474,554

$
3,385,972

Tangible Common Equity/Tangible Assets

7.57
%

7.87
%

8.60
%

8.91
%

8.81
%

Tangible Book Value Per Share

Book Value Per Common Share

$
11.44

$
11.14

$
11.12

$
11.09

$
10.73

Less: Effects of Intangible Assets

(0.11)

(0.11)

(0.11)

(0.11)

(0.11)

Tangible Book Value Per Common Share

$
11.33

$
11.03

$
11.01

$
10.98

$
10.62

Return on Average Tangible Common Equity

Net Income Available to Common Shareholders

$
13,500

$
11,868

$
11,249

$
11,343

$
11,509

$
36,617

$
33,173

Average Shareholders' Equity

$
384,020

$
381,448

$
383,024

$
374,035

$
330,604

$
382,834

$
296,760

Less: Average Preferred Stock

(66,514)

(66,514)

(66,514)

(66,515)

(32,332)

(66,514)

(10,896)

Average Common Equity

317,506

314,934

316,510

307,520

298,272

316,320

285,864

Less: Effects of Average Intangible Assets

(2,989)

(3,037)

(3,084)

(3,132)

(3,180)

(3,036)

(3,227)

Average Tangible Common Equity

$
314,517

$
311,897

$
313,426

$
304,388

$
295,092

$
313,284

$
282,637

Return on Average Tangible Common Equity

17.03
%

15.26
%

14.56
%

14.78
%

15.47
%

15.63
%

15.69
%

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk

As a financial institution, the ~~Company��s~~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

~~Table of Contents~~

interest bearing liabilities mature or re-price at different times, on a different basis or in unequal amounts. Interest rate risk also arises when assets and liabilities each respond differently to changes in interest rates.

The Company’s management of interest rate risk is overseen by its ALM Committee, based on a risk management infrastructure approved by the board of directors that outlines reporting and measurement requirements. In particular, this infrastructure sets limits and management targets for various metrics, including net interest income simulation involving parallel shifts in interest rate curves, steepening and flattening yield curves, and various prepayment and deposit duration assumptions. The Company’s risk management infrastructure also requires a periodic review of all key assumptions used, such as identifying appropriate interest rate scenarios, setting loan prepayment rates based on historical analysis and noninterest bearing and interest bearing transaction deposit durations based on historical analysis. The Company does not engage in speculative trading activities relating to interest rates, foreign exchange rates, commodity prices, equities or credit.

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

The Company has entered into certain hedging transactions including interest rate swaps and caps, which are designed to lessen elements of the Company’s interest rate exposure. Cash flow hedge relationships mitigate exposure to the variability of future cash flows or other forecasted transactions. The Company utilizes cash flow hedges to manage interest rate exposure for the brokered deposit and wholesale borrowing portfolios. At ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, these cash flow hedges had a total notional amount of ~~$250.0~~$308.0 million and ~~$235.0~~$288.0 million, respectively. In the event that interest rates do not change in the manner anticipated, such transactions may adversely affect the Company’s results of operations.

Net Interest Income Simulation

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

Potential changes to the Company’s net interest income in hypothetical rising and declining rate scenarios calculated as of ~~September 30, 2022~~March 31, 2023 are presented in the table below. The projections assume an immediate, parallel shift

Table of Contents

downward of the yield curve of 100, 200, and ~~200~~300 basis points and immediate, parallel shifts upward of the yield curve of

~~Table of Contents~~

100, 200, 300 and 400 basis points. In the current interest rate environment, a downward shift of the yield curve of ~~300 and~~ 400 basis points does not provide us with meaningful results and thus is not presented.


(dollars in thousands)	September 30, 2022				December 31, 2021				March 31, 2023				December 31, 2022
Change (basis points)	Forecasted		Percentage		Forecasted		Percentage		Forecasted		Percentage		Forecasted		Percentage
in Interest Rates	Net Interest		Change		Net Interest		Change		Net Interest		Change		Net Interest		Change
(12-Month Projection)	Income		from Base		Income		from Base		Income		from Base		Income		from Base
+400	$	133,251	(7.88)	%	$	116,256	5.75	%	$	99,085	(18.88)	%	$	129,621	(4.84)	%
+300		136,485	(5.65)			114,328	4.00			104,927	(14.09)			131,357	(3.57)
+200		139,442	(3.60)			112,288	2.15			110,793	(9.29)			133,089	(2.30)
+100		142,158	(1.73)			110,539	0.55			116,465	(4.65)			134,591	(1.20)
0		144,657	—			109,930	—			122,139	—			136,220	—
−100		149,153	3.11			106,955	(2.71)			129,734	6.22			137,641	1.04
−200		148,178	2.43			NM	NM			137,045	12.20			137,968	1.28
−300										143,968	17.87			138,587	1.74

The table above indicates that as of ~~September 30, 2022,~~March 31, 2023, in the event of an immediate and sustained 400 basis point increase in interest rates, the Company would experience a ~~7.88%~~18.88% decrease in net interest income. In the event of an immediate ~~200~~300 basis point decrease in interest rates, the Company would experience a ~~2.43%~~17.87% increase in net interest income.

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

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the design and operation of the Company’s “disclosure controls and procedures” (as that term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, or the Exchange Act) as of ~~September 30, 2022,~~March 31, 2023, the end of the fiscal quarter covered by this Quarterly Report on Form 10-Q. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of ~~September 30, 2022,~~March 31, 2023, the Company’s disclosure controls and procedures were effective to ensure that the information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

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

6465

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PART II – OTHER INFORMATION

Item 1. Legal Proceedings

Item 1.A. Risk Factors

There have been no material changes to the risk factors disclosed in the Company’s Annual Report on Form 10-K filed with the SEC on March ~~8, 2022.~~7, 2023.

~~Table of Contents~~

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

Issuer Repurchases of Equity Securities

The following table presents stock purchases made during the ~~third~~first quarter of ~~2022:~~2023:


Period	Total Number of Shares Purchased ⁽¹⁾	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs ⁽²⁾	Maximum Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs		Total Number of Shares Purchased ⁽¹⁾	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs ⁽²⁾	Maximum Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
July 1 - 31, 2022	100,388	$	16.27	99,310	$	1,627,982
August 1 - 31, 2022	—		—	—		25,000,000
September 1 - 30, 2022	—		—	—		25,000,000
January 1 - 31, 2023							225	$	17.40	—	$	25,000,000
February 1 - 28, 2023							180		15.23	—		25,000,000
March 1 - 31, 2023							534		14.60	—		25,000,000
Total	100,388	$	16.27	99,310	$	25,000,000	939	$	15.39	—	$	25,000,000

(1)

The total number of shares repurchased during the periods indicated includes shares repurchased as part of the Company’s stock repurchase program and shares withheld for income tax purposes in connection with vesting of restricted stock. The shares were purchased or otherwise valued at the closing price of the Company’s common stock on the date of purchase and/or withholding.

(2)

On August 17, 2022, the Company’s board of directors approved a new stock repurchase program which authorizes the Company to repurchase up to $25.0 million of its common stock, subject to certain limitations and conditions. The new stock repurchase program replaced and superseded the previous $40.0 million stock repurchase program which expired on October 27, 2022, under which approximately $1.6 million remained. The new stock repurchase program will expire on August 16, 2024. The stock repurchase program does not obligate the Company to repurchase any shares of its common stock, and other than repurchases that have been completed to date, there is no assurance that the Company will do so. Under the stock repurchase program, the Company may repurchase shares of common stock from time to time in open market or privately negotiated transactions. The extent to which the Company repurchases its shares, and the timing of such repurchases, will depend upon a variety of factors, including general market and economic conditions, regulatory requirements, availability of funds, and other relevant considerations, as determined by the Company. The Company may, in its discretion, begin, suspend or terminate repurchases at any time prior to the Program’s expiration, without any prior notice.

Unregistered Sales of Equity Securities

None.

Use of Proceeds from Registered Securities

None.

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Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

~~Table of Contents~~

Item 5. Other Information

None.

Item 6. Exhibits


Exhibit Number		Description
3.1		~~Second~~Third Amended and Restated Articles of Incorporation of Bridgewater Bancshares, Inc. (incorporated herein by reference to Exhibit 3.1 on Form 8-K filed on April ~~25, 2019)~~27, 2023)
3.2		Second Amended and Restated Bylaws of Bridgewater Bancshares, Inc. (incorporated herein by reference to Exhibit 3.2 on Form ~~S-1/A~~8-K filed on ~~March 5, 2018)~~April 27, 2023)
3.3		Statement of Designation of 5.875% Non-Cumulative Perpetual Preferred Stock, Series A (incorporated herein by reference to Exhibit 3.1 on Form 8-K filed on August 17, 2021)
10.1		Second Amendment to Loan and Security Agreement, dated as of September 1, 2022, by and between Bridgewater Bancshares, Inc. and ServisFirst Bank (incorporated herein by reference to Exhibit 10.1 on Form 8-K filed on September 1, 2022)
10.2		Amended and Restated Revolving Note, dated as of September 1, 2022, made by Bridgewater Bancshares, Inc. to and in favor of ServisFirst Bank (incorporated herein by reference to Exhibit 10.2 on Form 8-K filed on September 1, 2022)
31.1		Certification of the Chief Executive Officer required by Rule 13a-14(a) of the Securities Exchange Act of 1934, and Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certification of the Chief Financial Officer required by Rule 13a-14(a) of the Securities Exchange Act of 1934, and Section 302 of the Sarbanes-Oxley Act of 2002
32.1		Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2		Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.1		Financial information from the Company’s Quarterly Report on Form 10-Q for the quarterly period ended ~~September 30, 2022,~~March 31, 2023, formatted in inline XBRL interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Income; (iii) Consolidated Statements of Comprehensive Income; (iv) Consolidated Statements of Shareholders’ Equity; (v) Consolidated Statements of Cash Flows; and (vi) Notes to Consolidated Financial Statements
104		The cover page for Bridgewater Bancshares, Inc’s Form 10-Q Report for the quarterly period ended ~~September 30, 2022~~March 31, 2023 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.

Date: ~~November 3, 2022~~May 4, 2023	By:	/s/ Jerry J. Baack
	Name:	Jerry J. Baack
	Title:	Chairman, Chief Executive Officer and President (Principal Executive Officer)

Date: ~~November 3, 2022~~May 4, 2023	By:	/s/ Joe M. Chybowski
	Name:	Joe M. Chybowski
	Title:	Chief Financial Officer (Principal Financial and Accounting Officer)


	Interest-Only			Extended Amortization			Total
(dollars in thousands)	Amount		# of Loans	Amount		# of Loans	Amount		# of Loans
Real Estate Mortgage:
CRE Nonowner Occupied	$	10,623	1	$	—	—	$	10,623	1
Totals	$	10,623	1	$	—	—	$	10,623	1


		Nine Months Ended September 30, 2022
		Compared with
		Nine Months Ended September 30, 2021
		Change Due To:				Interest
(dollars in thousands)		Volume		Rate		Variance
Interest Earning Assets:
Cash Investments	$	(213)	$	310	$	97
Investment Securities:
Taxable Investment Securities		2,235		1,335		3,570
Tax-Exempt Investment Securities		(86)		(1)		(87)
Total Securities		2,149		1,334		3,483
Loans:
Paycheck Protection Program Loans		(11,065)		6,603		(4,462)
Loans		22,672		(1,901)		20,771
Total Loans		11,607		4,702		16,309
Federal Home Loan Bank Stock		110		(41)		69
Total Interest Earning Assets	$	13,653	$	6,305	$	19,958

Interest Bearing Liabilities:
Interest Bearing Transaction Deposits	$	525	$	293	$	818
Savings and Money Market Deposits		841		903		1,744
Time Deposits		(360)		(652)		(1,012)
Brokered Deposits		95		352		447
Total Deposits		1,101		896		1,997
Federal Funds Purchased		1,084		38		1,122
Notes Payable		—		(61)		(61)
FHLB Advances		(25)		2		(23)
Subordinated Debentures		501		(254)		247
Total Interest Bearing Liabilities		2,661		621		3,282
Net Interest Income	$	10,992	$	5,684	$	16,676



	Originated				Outstanding				Program Lifetime
	Number		Principal		Number		Principal		Net Origination		Net Origination
(dollars in thousands)	of Loans		Balance		of Loans		Balance		Fees Generated		Fees Earned
Round One PPP Loans		1,200	$	181,600		1	$	160	$	5,706	$	5,706
Round Two PPP Loans		651		78,386		5		1,032		3,544		3,499
Totals		1,851	$	259,986		6	$	1,192	$	9,250	$	9,205