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 JuneSeptember 30, 2023
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ____________ to ________
Commission File Number 001-38412
BRIDGEWATER BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
| | |
Minnesota | | 26-0113412 |
| | |
4450 Excelsior Boulevard, Suite 100 | | 55416 |
(952) 893-6868
(Registrant’s telephone number, including area code)
. Securities registered pursuant to Section 12(b) of the Act:
Title of each class: |
| Trading Symbol |
| Name of each exchange on which registered: |
Common Stock, $0.01 Par Value |
| BWB |
| The Nasdaq Stock Market LLC |
Depositary Shares, each representing a 1/100th interest in a share of 5.875% Non-Cumulative Perpetual Preferred Stock, Series A, par value $0.01 per share | | BWBBP | | 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 August 1,October 31, 2023 was 27,975,91728,000,570.
Table of Contents
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. Quantitative and Qualitative Disclosures About Market Risk | 67 |
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2
PART 1 – FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Bridgewater Bancshares, Inc. and Subsidiaries
Consolidated Balance Sheets
(dollars in thousands, except share data)
| | | | | | | | | | | | |
| | June 30, | | December 31, | | September 30, | | December 31, | ||||
|
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||
| | (Unaudited) | | | | | (Unaudited) | | | | ||
ASSETS | | | | | | | | | | | | |
Cash and Cash Equivalents | | $ | 177,101 | | $ | 87,043 | | $ | 124,358 | | $ | 87,043 |
Bank-Owned Certificates of Deposit | |
| 1,225 | |
| 1,181 | |
| 1,225 | |
| 1,181 |
Securities Available for Sale, at Fair Value | |
| 538,220 | |
| 548,613 | |
| 553,076 | |
| 548,613 |
Loans, Net of Allowance for Credit Losses of $50,701 at June 30, 2023 (unaudited) and $47,996 at December 31, 2022 | | | 3,677,792 | |
| 3,512,157 | ||||||
Loans, Net of Allowance for Credit Losses of $50,585 at September 30, 2023 (unaudited) and $47,996 at December 31, 2022 | | | 3,664,464 | |
| 3,512,157 | ||||||
Federal Home Loan Bank (FHLB) Stock, at Cost | |
| 21,557 | |
| 19,606 | |
| 17,056 | |
| 19,606 |
Premises and Equipment, Net | |
| 49,710 | |
| 48,445 | |
| 49,331 | |
| 48,445 |
Foreclosed Assets | | | 116 | | | — | ||||||
Accrued Interest | |
| 13,822 | |
| 13,479 | |
| 15,182 | |
| 13,479 |
Goodwill | |
| 2,626 | |
| 2,626 | |
| 2,626 | |
| 2,626 |
Other Intangible Assets, Net | |
| 206 | |
| 288 | |
| 197 | |
| 288 |
Bank-Owned Life Insurance | | | 33,958 | | | 33,485 | | | 34,209 | | | 33,485 |
Other Assets | |
| 86,852 | |
| 78,739 | |
| 95,346 | |
| 78,739 |
Total Assets | | $ | 4,603,185 | | $ | 4,345,662 | | $ | 4,557,070 | | $ | 4,345,662 |
| | | | | | | | | | | | |
LIABILITIES AND EQUITY | |
|
| |
|
| |
|
| |
|
|
LIABILITIES | |
|
| |
|
| |
|
| |
|
|
Deposits: | |
|
| |
|
| |
|
| |
|
|
Noninterest Bearing | | $ | 751,217 | | $ | 884,272 | | $ | 754,297 | | $ | 884,272 |
Interest Bearing | |
| 2,826,715 | |
| 2,532,271 | |
| 2,921,212 | |
| 2,532,271 |
Total Deposits | |
| 3,577,932 | |
| 3,416,543 | |
| 3,675,509 | |
| 3,416,543 |
Federal Funds Purchased | |
| 195,000 | |
| 287,000 | |
| — | |
| 287,000 |
Notes Payable | | | 13,750 | | | 13,750 | | | 13,750 | | | 13,750 |
FHLB Advances | |
| 262,000 | |
| 97,000 | |
| 294,500 | |
| 97,000 |
Subordinated Debentures, Net of Issuance Costs | |
| 79,096 | |
| 78,905 | |
| 79,192 | |
| 78,905 |
Accrued Interest Payable | |
| 2,974 | |
| 2,831 | |
| 3,816 | |
| 2,831 |
Other Liabilities | |
| 63,307 | |
| 55,569 | |
| 74,343 | |
| 55,569 |
Total Liabilities | |
| 4,194,059 | |
| 3,951,598 | |
| 4,141,110 | |
| 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 June 30, 2023 (unaudited) and December 31, 2022 | | | 66,514 | |
| 66,514 | ||||||
Preferred Stock - Issued and Outstanding 27,600 Series A shares ($2,500 liquidation preference) at September 30, 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 27,973,995 at June 30, 2023 (unaudited) and 27,751,950 at December 31, 2022 | | | 280 | |
| 278 | ||||||
Common Stock - Issued and Outstanding 28,015,505 at September 30, 2023 (unaudited) and 27,751,950 at December 31, 2022 | | | 280 | |
| 278 | ||||||
Additional Paid-In Capital | |
| 99,044 | |
| 96,529 | |
| 100,120 | |
| 96,529 |
Retained Earnings | |
| 264,196 | |
| 248,685 | |
| 272,812 | |
| 248,685 |
Accumulated Other Comprehensive Loss | |
| (20,908) | |
| (17,942) | |
| (23,766) | |
| (17,942) |
Total Shareholders' Equity | |
| 409,126 | |
| 394,064 | |
| 415,960 | |
| 394,064 |
Total Liabilities and Equity | | $ | 4,603,185 | | $ | 4,345,662 | | $ | 4,557,070 | | $ | 4,345,662 |
See accompanying notes to consolidated financial statements.
3
Bridgewater Bancshares, Inc. and Subsidiaries
Consolidated Statements of Income
(dollars in thousands, except per share data)
(Unaudited)
| | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended | ||||||||
| | June 30, | | June 30, | | June 30, | | June 30, | ||||
|
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||
INTEREST INCOME |
| |
|
| |
|
| |
|
| |
|
Loans, Including Fees | | $ | 47,721 | | $ | 34,358 | | $ | 92,676 | | $ | 66,102 |
Investment Securities | |
| 6,237 | |
| 3,325 | |
| 12,455 | |
| 6,195 |
Other | |
| 1,043 | |
| 99 | |
| 1,862 | |
| 179 |
Total Interest Income | |
| 55,001 | |
| 37,782 | |
| 106,993 | |
| 72,476 |
| | | | | | | | | | | | |
INTEREST EXPENSE | |
| | |
| | |
| | |
| |
Deposits | |
| 22,998 | |
| 3,456 | |
| 39,372 | | | 6,614 |
Notes Payable | |
| 285 | |
| — | |
| 548 | | | — |
FHLB Advances | |
| 2,092 | |
| 167 | |
| 2,953 | | | 317 |
Subordinated Debentures | |
| 993 | |
| 1,219 | |
| 1,976 | | | 2,416 |
Federal Funds Purchased | |
| 2,761 | |
| 410 | |
| 7,705 | | | 419 |
Total Interest Expense | |
| 29,129 | |
| 5,252 | |
| 52,554 | |
| 9,766 |
| | | | | | | | | | | | |
NET INTEREST INCOME | |
| 25,872 | |
| 32,530 | |
| 54,439 | |
| 62,710 |
Provision for Credit Losses | |
| 50 | |
| 3,025 | |
| 675 | | | 4,700 |
| | | | | | | | | | | | |
NET INTEREST INCOME AFTER | |
|
| |
|
| |
|
| |
|
|
PROVISION FOR CREDIT LOSSES | |
| 25,822 | |
| 29,505 | |
| 53,764 | |
| 58,010 |
| | | | | | | | | | | | |
NONINTEREST INCOME | |
|
| |
|
| |
|
| |
|
|
Customer Service Fees | |
| 368 | | | 298 | |
| 717 | | | 579 |
Net Gain (Loss) on Sales of Available for Sale Securities | |
| 50 | | | 52 | |
| (6) | | | 52 |
Other Income | |
| 997 | | | 1,300 | |
| 2,647 | | | 2,576 |
Total Noninterest Income | |
| 1,415 | |
| 1,650 | |
| 3,358 | |
| 3,207 |
| | | | | | | | | | | | |
NONINTEREST EXPENSE | |
|
| |
|
| |
|
| |
|
|
Salaries and Employee Benefits | |
| 8,589 | | | 8,977 | |
| 17,404 | | | 17,671 |
Occupancy and Equipment | |
| 1,075 | | | 1,042 | |
| 2,284 | | | 2,127 |
Other Expense | |
| 4,724 | | | 3,733 | |
| 8,883 | | | 7,462 |
Total Noninterest Expense | |
| 14,388 | |
| 13,752 | |
| 28,571 | |
| 27,260 |
| | | | | | | | | | | | |
INCOME BEFORE INCOME TAXES | |
| 12,849 | |
| 17,403 | |
| 28,551 | |
| 33,957 |
Provision for Income Taxes | |
| 3,033 | |
| 4,521 | |
| 7,093 | |
| 8,813 |
NET INCOME | | | 9,816 | | | 12,882 | | | 21,458 | | | 25,144 |
Preferred Stock Dividends | | | (1,014) | | | (1,014) | | | (2,027) | | | (2,027) |
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS | | $ | 8,802 | | $ | 11,868 | | $ | 19,431 | | $ | 23,117 |
| | | | | | | | | | | | |
EARNINGS PER SHARE | |
|
| |
|
| |
|
| |
| |
Basic | | $ | 0.32 | | $ | 0.43 | | $ | 0.70 | | $ | 0.83 |
Diluted | | | 0.31 | | | 0.41 | | | 0.69 | | | 0.80 |
| | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | ||||||||
| | September 30, | | September 30, | | September 30, | | September 30, | ||||
|
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||
INTEREST INCOME |
| |
|
| |
|
| |
|
| |
|
Loans, Including Fees | | $ | 48,999 | | $ | 37,666 | | $ | 141,675 | | $ | 103,768 |
Investment Securities | |
| 6,507 | |
| 4,372 | |
| 18,962 | |
| 10,567 |
Other | |
| 1,303 | |
| 321 | |
| 3,165 | |
| 500 |
Total Interest Income | |
| 56,809 | |
| 42,359 | |
| 163,802 | |
| 114,835 |
| | | | | | | | | | | | |
INTEREST EXPENSE | |
| | |
| | |
| | |
| |
Deposits | |
| 27,225 | |
| 5,984 | |
| 66,597 | | | 12,598 |
Notes Payable | |
| 296 | |
| — | |
| 844 | | | — |
FHLB Advances | |
| 2,316 | |
| 329 | |
| 5,269 | | | 646 |
Subordinated Debentures | |
| 1,003 | |
| 1,242 | |
| 2,979 | | | 3,658 |
Federal Funds Purchased | |
| 548 | |
| 709 | |
| 8,253 | | | 1,128 |
Total Interest Expense | |
| 31,388 | |
| 8,264 | |
| 83,942 | |
| 18,030 |
| | | | | | | | | | | | |
NET INTEREST INCOME | |
| 25,421 | |
| 34,095 | |
| 79,860 | |
| 96,805 |
Provision for (Recovery of) Credit Losses | |
| (600) | |
| 1,500 | |
| 75 | | | 6,200 |
| | | | | | | | | | | | |
NET INTEREST INCOME AFTER | |
|
| |
|
| |
|
| |
|
|
PROVISION FOR CREDIT LOSSES | |
| 26,021 | |
| 32,595 | |
| 79,785 | |
| 90,605 |
| | | | | | | | | | | | |
NONINTEREST INCOME | |
|
| |
|
| |
|
| |
|
|
Customer Service Fees | |
| 379 | | | 313 | |
| 1,096 | | | 892 |
Net Gain (Loss) on Sales of Available for Sale Securities | |
| — | | | — | |
| (6) | | | 52 |
Other Income | |
| 1,347 | | | 1,074 | |
| 3,994 | | | 3,650 |
Total Noninterest Income | |
| 1,726 | |
| 1,387 | |
| 5,084 | |
| 4,594 |
| | | | | | | | | | | | |
NONINTEREST EXPENSE | |
|
| |
|
| |
|
| |
|
|
Salaries and Employee Benefits | |
| 9,519 | | | 9,449 | |
| 26,923 | | | 27,120 |
Occupancy and Equipment | |
| 1,101 | | | 1,086 | |
| 3,385 | | | 3,213 |
Other Expense | |
| 4,730 | | | 3,622 | |
| 13,613 | | | 11,084 |
Total Noninterest Expense | |
| 15,350 | |
| 14,157 | |
| 43,921 | |
| 41,417 |
| | | | | | | | | | | | |
INCOME BEFORE INCOME TAXES | |
| 12,397 | |
| 19,825 | |
| 40,948 | |
| 53,782 |
Provision for Income Taxes | |
| 2,768 | |
| 5,312 | |
| 9,861 | |
| 14,125 |
NET INCOME | | | 9,629 | | | 14,513 | | | 31,087 | | | 39,657 |
Preferred Stock Dividends | | | (1,013) | | | (1,013) | | | (3,040) | | | (3,040) |
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS | | $ | 8,616 | | $ | 13,500 | | $ | 28,047 | | $ | 36,617 |
| | | | | | | | | | | | |
EARNINGS PER SHARE | |
| | |
|
| |
|
| |
| |
Basic | | $ | 0.31 | | $ | 0.49 | | $ | 1.01 | | $ | 1.32 |
Diluted | | | 0.30 | | | 0.47 | | | 0.99 | | | 1.27 |
See accompanying notes to consolidated financial statements.
4
Bridgewater Bancshares, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
(dollars in thousands)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended | | Three Months Ended | | Nine Months Ended | ||||||||||||||||
| | June 30, | | June 30, | | September 30, | | September 30, | ||||||||||||||||
|
| 2023 |
| 2022 |
| 2023 |
| 2022 |
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||||||
Net Income | | $ | 9,816 | | $ | 12,882 | | $ | 21,458 | | $ | 25,144 | | $ | 9,629 | | $ | 14,513 | | $ | 31,087 | | $ | 39,657 |
Other Comprehensive Loss: | |
| | | | | |
| | | | | |
| | | | | |
| | | | |
Unrealized Losses on Available for Sale Securities | | | (9,430) | | | (15,402) | | | (4,187) | | | (38,414) | | | (10,151) | | | (18,073) | | | (14,338) | | | (56,487) |
Unrealized Gains on Cash Flow Hedges | | | 6,573 | | | 4,363 | | | 2,404 | | | 13,392 | | | 7,763 | | | 7,725 | | | 10,167 | | | 21,117 |
Reclassification Adjustment for (Gains) Losses Realized in Income | | | (1,370) | | | 207 | | | (2,381) | | | 630 | | | (1,623) | | | (119) | | | (4,004) | | | 511 |
Income Tax Impact | | | 1,215 | | | 1,478 | | | 1,198 | | | 4,325 | | | 1,153 | | | 4,808 | | | 2,351 | | | 9,133 |
Total Other Comprehensive Loss, Net of Tax | | | (3,012) | | | (9,354) | | | (2,966) | | | (20,067) | | | (2,858) | | | (5,659) | | | (5,824) | | | (25,726) |
Comprehensive Income | | $ | 6,804 | | $ | 3,528 | | $ | 18,492 | | $ | 5,077 | | $ | 6,771 | | $ | 8,854 | | $ | 25,263 | | $ | 13,931 |
See accompanying notes to consolidated financial statements.
5
Bridgewater Bancshares, Inc. and Subsidiaries
Consolidated Statements of Shareholders’ Equity
Three and SixNine Months Ended JuneSeptember 30, 2023 and 2022
(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 |
| Loss |
| Total | | Stock |
| Shares |
| Amount |
| Capital |
| Earnings |
| Loss |
| Total | ||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
BALANCE March 31, 2022 |
| $ | 66,514 | | 28,150,389 | | $ | 282 | | $ | 103,756 | | $ | 210,596 | | $ | (1,707) | | $ | 379,441 | ||||||||||||||||||||
BALANCE June 30, 2022 |
| $ | 66,514 | | 27,677,372 | | $ | 277 | | $ | 96,689 | | $ | 222,464 | | $ | (11,061) | | $ | 374,883 | ||||||||||||||||||||
Stock-based Compensation |
| | — | | 5,000 | | | — | | | 850 | | | — | | | — | |
| 850 |
| | — | | 4,744 | | | — | | | 876 | | | — | | | — | |
| 876 |
Comprehensive Income (Loss) |
| | — | | — | | | — | | | — | | | 12,882 | | | (9,354) | |
| 3,528 |
| | — | | — | | | — | | | — | | | 14,513 | | | (5,659) | |
| 8,854 |
Stock Options Exercised | | | — | | 14,750 | | | — | | | 44 | | | — | | | — | | | 44 | | | — | | 3,250 | | | — | | | 41 | | | — | | | — | | | 41 |
Stock Repurchases | | | — | | (492,417) | | | (5) | | | (7,954) | | | — | | | — | | | (7,959) | | | — | | (99,310) | | | (1) | | | (1,615) | | | — | | | — | | | (1,616) |
Forfeiture of Restricted Stock Awards | | | — | | (600) | | | — | | | (2) | | | — | | | — | | | (2) | ||||||||||||||||||||
Vested Restricted Stock Units | | | — | | 600 | | | — | | | — | | | — | | | — | | | — | | | — | | 3,000 | | | — | | | — | | | — | | | — | | | — |
Restricted Shares Withheld for Taxes | | | — | | (350) | | | — | | | (5) | | | — | | | — | | | (5) | | | — | | (1,078) | | | — | | | (18) | | | — | | | — | | | (18) |
Preferred Stock Dividend | | | — | | — | | | — | | | — | | | (1,014) | | | — | | | (1,014) | | | — | | — | | | — | | | — | | | (1,013) | | | — | | | (1,013) |
BALANCE June 30, 2022 |
| $ | 66,514 | | 27,677,372 | | $ | 277 | | $ | 96,689 | | $ | 222,464 | | $ | (11,061) | | $ | 374,883 | ||||||||||||||||||||
BALANCE September 30, 2022 |
| $ | 66,514 | | 27,587,978 | | $ | 276 | | $ | 95,973 | | $ | 235,964 | | $ | (16,720) | | $ | 382,007 | ||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
BALANCE March 31, 2023 |
| $ | 66,514 | | 27,845,244 | | $ | 278 | | $ | 97,716 | | $ | 255,394 | | $ | (17,896) | | $ | 402,006 | ||||||||||||||||||||
BALANCE June 30, 2023 |
| $ | 66,514 | | 27,973,995 | | $ | 280 | | $ | 99,044 | | $ | 264,196 | | $ | (20,908) | | $ | 409,126 | ||||||||||||||||||||
Stock-based Compensation |
| | — | | 12,264 | | | — | | | 972 | | | — | | | — | |
| 972 |
| | — | | 12,588 | | | — | | | 997 | | | — | | | — | |
| 997 |
Comprehensive Income (Loss) |
| | — | | — | | | — | | | — | | | 9,816 | | | (3,012) | |
| 6,804 |
| | — | | — | | | — | | | — | | | 9,629 | | | (2,858) | |
| 6,771 |
Stock Options Exercised | | | — | | 117,000 | | | 2 | | | 364 | | | — | | | — | | | 366 | | | — | | 27,000 | | | — | | | 90 | | | — | | | — | | | 90 |
Forfeiture of Restricted Stock Awards | | | | | (250) | | | — | | | — | | | — | | | — | | | — | ||||||||||||||||||||
Vested Restricted Stock Units | | | — | | 600 | | | — | | | — | | | — | | | — | | | — | | | — | | 3,000 | | | — | | | — | | | — | | | — | | | — |
Restricted Shares Withheld for Taxes | | | — | | (863) | | | — | | | (8) | | | — | | | — | | | (8) | | | — | | (1,078) | | | — | | | (11) | | | — | | | — | | | (11) |
Preferred Stock Dividend | | | — | | — | | | — | | | — | | | (1,014) | | | — | | | (1,014) | | | — | | — | | | — | | | — | | | (1,013) | | | — | | | (1,013) |
BALANCE June 30, 2023 |
| $ | 66,514 | | 27,973,995 | | $ | 280 | | $ | 99,044 | | $ | 264,196 | | $ | (20,908) | | $ | 409,126 | ||||||||||||||||||||
BALANCE September 30, 2023 |
| $ | 66,514 | | 28,015,505 | | $ | 280 | | $ | 100,120 | | $ | 272,812 | | $ | (23,766) | | $ | 415,960 |
See accompanying notes to consolidated financial statements.
6
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | Accumulated | | | | |
| | | | | | | | | | Additional | | | | | Other | | | | ||
| | Preferred | | Common Stock | | Paid-In | | Retained | | Comprehensive | | | | |||||||
Six Months Ended |
| Stock |
| Shares |
| Amount |
| Capital |
| Earnings |
| Income (Loss) |
| Total | ||||||
| | | | | | | | | | | | | | | | | | | | |
BALANCE December 31, 2021 |
| $ | 66,514 | | 28,206,566 | | $ | 282 | | $ | 104,123 | | $ | 199,347 | | $ | 9,006 | | $ | 379,272 |
Stock-based Compensation |
| | — | | 9,656 | | | — | | | 1,681 | | | — | | | — | |
| 1,681 |
Comprehensive Income (Loss) |
| | — | | — | | | — | | | — | | | 25,144 | |
| (20,067) | |
| 5,077 |
Preferred Stock Offering, Net of Issuance Costs | | | — | | — | | | — | | | — | | | (2,027) | | | — | | | (2,027) |
Stock Options Exercised | | | — | | 24,750 | | | — | | | 65 | | | — | | | — | | | 65 |
Stock Repurchases | | | — | | (563,455) | | | (5) | | | (9,157) | | | — | | | — | | | (9,162) |
Issuance of Restricted Stock Awards | | | — | | 1,100 | | | — | | | (3) | | | — | | | — | | | (3) |
Restricted Shares Withheld for Taxes | | | — | | (1,245) | | | — | | | (20) | | | — | | | — | | | (20) |
BALANCE June 30, 2022 |
| $ | 66,514 | | 27,677,372 | | $ | 277 | | $ | 96,689 | | $ | 222,464 | | $ | (11,061) | | $ | 374,883 |
| | | | | | | | | | | | | | | | | | | | |
BALANCE December 31, 2022 | | $ | 66,514 | | 27,751,950 | | $ | 278 | | $ | 96,529 | | $ | 248,685 | | $ | (17,942) | | $ | 394,064 |
Cumulative Effect of Change in Accounting Principle, Net of Tax | | | — | | — | | | — | | | — | | | (3,920) | | | — | | | (3,920) |
Balance as of January 1, 2023, as Adjusted for Change in Accounting Principle | | | 66,514 | | 27,751,950 | | | 278 | | | 96,529 | | | 244,765 | | | (17,942) | | | 390,144 |
Stock-based Compensation |
| | — | | 22,872 | | | — | | | 1,913 | | | — | | | — | |
| 1,913 |
Comprehensive Income (Loss) |
| | — | | — | | | — | | | — | | | 21,458 | | | (2,966) | |
| 18,492 |
Stock Options Exercised | | | — | | 199,000 | | | 2 | | | 625 | | | — | | | — | | | 627 |
Forfeiture of Restricted Stock Awards | | | — | | (250) | | | — | | | — | | | — | | | — | | | — |
Vested Restricted Stock Units | | | — | | 2,225 | | | — | | | — | | | — | | | — | | | — |
Restricted Shares Withheld for Taxes | | | — | | (1,802) | | | — | | | (23) | | | — | | | — | | | (23) |
Preferred Stock Dividend | | | — | | — | | | — | | | — | | | (2,027) | | | — | | | (2,027) |
BALANCE June 30, 2023 |
| $ | 66,514 | | 27,973,995 | | $ | 280 | | $ | 99,044 | | $ | 264,196 | | $ | (20,908) | | $ | 409,126 |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | Accumulated | | | | |
| | | | | | | | | | Additional | | | | | Other | | | | ||
| | Preferred | | Common Stock | | Paid-In | | Retained | | Comprehensive | | | | |||||||
Nine Months Ended |
| Stock |
| Shares |
| Amount |
| Capital |
| Earnings |
| Income (Loss) |
| Total | ||||||
| | | | | | | | | | | | | | | | | | | | |
BALANCE December 31, 2021 |
| $ | 66,514 | | 28,206,566 | | $ | 282 | | $ | 104,123 | | $ | 199,347 | | $ | 9,006 | | $ | 379,272 |
Stock-based Compensation |
| | — | | 14,400 | | | — | | | 2,557 | | | — | | | — | |
| 2,557 |
Comprehensive Income (Loss) |
| | — | | — | | | — | | | — | | | 39,657 | | | (25,726) | |
| 13,931 |
Stock Options Exercised | | | — | | 28,000 | | | — | | | 106 | | | — | | | — | | | 106 |
Stock Repurchases | | | — | | (662,765) | | | (6) | | | (10,772) | | | — | | | — | | | (10,778) |
Forfeiture of Restricted Stock Awards | | | — | | (1,000) | | | — | | | (3) | | | — | | | — | | | (3) |
Vested Restricted Stock Units | | | — | | 5,100 | | | — | | | — | | | — | | | — | | | — |
Restricted Shares Withheld for Taxes | | | — | | (2,323) | | | — | | | (38) | | | — | | | — | | | (38) |
Preferred Stock Dividend | | | — | | — | | | — | | | — | | | (3,040) | | | — | | | (3,040) |
BALANCE September 30, 2022 |
| $ | 66,514 | | 27,587,978 | | $ | 276 | | $ | 95,973 | | $ | 235,964 | | $ | (16,720) | | $ | 382,007 |
| | | | | | | | | | | | | | | | | | | | |
BALANCE December 31, 2022 | | $ | 66,514 | | 27,751,950 | | $ | 278 | | $ | 96,529 | | $ | 248,685 | | $ | (17,942) | | $ | 394,064 |
Cumulative Effect of Change in Accounting Principle, Net of Tax | | | — | | — | | | — | | | — | | | (3,920) | | | — | | | (3,920) |
Balance as of January 1, 2023, as Adjusted for Change in Accounting Principle | | | 66,514 | | 27,751,950 | | | 278 | | | 96,529 | | | 244,765 | | | (17,942) | | | 390,144 |
Stock-based Compensation |
| | — | | 35,460 | | | — | | | 2,910 | | | — | | | — | |
| 2,910 |
Comprehensive Income (Loss) |
| | — | | — | | | — | | | — | | | 31,087 | | | (5,824) | |
| 25,263 |
Stock Options Exercised | | | — | | 226,000 | | | 2 | | | 715 | | | — | | | — | | | 717 |
Forfeiture of Restricted Stock Awards | | | — | | (250) | | | — | | | — | | | — | | | — | | | — |
Vested Restricted Stock Units | | | — | | 5,225 | | | — | | | — | | | — | | | — | | | — |
Restricted Shares Withheld for Taxes | | | — | | (2,880) | | | — | | | (34) | | | — | | | — | | | (34) |
Preferred Stock Dividend | | | — | | — | | | — | | | — | | | (3,040) | | | — | | | (3,040) |
BALANCE September 30, 2023 |
| $ | 66,514 | | 28,015,505 | | $ | 280 | | $ | 100,120 | | $ | 272,812 | | $ | (23,766) | | $ | 415,960 |
See accompanying notes to consolidated financial statements.
7
Bridgewater Bancshares, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(dollars in thousands)
(Unaudited)
| | | | | | |
| | Six Months Ended | ||||
| | June 30, | ||||
| | 2023 | | 2022 | ||
CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | |
Net Income | | $ | 21,458 | | $ | 25,144 |
Adjustments to Reconcile Net Income to Net Cash | |
| | |
| |
Provided by Operating Activities: | |
| | |
| |
Net Amortization on Securities Available for Sale | |
| 212 | |
| 1,333 |
Net (Gain) Loss on Sales of Securities Available for Sale | |
| 6 | |
| (52) |
Provision for Credit Losses on Loans | |
| 2,050 | |
| 4,700 |
Provision (Credit) for Off-Balance Sheet Exposures | | | (1,375) | | | — |
Depreciation of Premises and Equipment | |
| 1,283 | |
| 1,260 |
Amortization of Other Intangible Assets | |
| 82 | |
| 96 |
Amortization of Right-of Use Asset | | | 251 | | | — |
Amortization of Subordinated Debt Issuance Costs | | | 191 | | | 220 |
Stock-based Compensation | |
| 1,913 | |
| 1,681 |
Changes in Operating Assets and Liabilities: | |
| | |
| |
Accrued Interest Receivable and Other Assets | |
| (6,547) | |
| (4,944) |
Accrued Interest Payable and Other Liabilities | |
| 3,192 | |
| 41,788 |
Net Cash Provided by Operating Activities | |
| 22,716 | |
| 71,226 |
| | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES | |
| | |
| |
(Increase) Decrease in Bank-Owned Certificates of Deposit | |
| (44) | | | 738 |
Proceeds from Sales of Securities Available for Sale | |
| 26,976 | | | 25,066 |
Proceeds from Maturities, Paydowns, Payups and Calls of Securities Available for Sale | |
| 14,118 | | | 18,986 |
Purchases of Securities Available for Sale | |
| (35,099) | | | (118,282) |
Net Increase in Loans | |
| (167,076) | | | (406,421) |
Net Increase in FHLB Stock | |
| (1,951) | | | (4,679) |
Purchases of Premises and Equipment | |
| (2,548) | | | (1,159) |
Net Cash Used in Investing Activities | | | (165,624) | |
| (485,751) |
| | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES | |
| | |
| |
Net Increase in Deposits | |
| 161,389 | | | 255,716 |
Net (Decrease) Increase in Federal Funds Purchased | | | (92,000) | | | 86,000 |
Proceeds from FHLB Advances | |
| 318,500 | | | 14,000 |
Principal Payments on FHLB Advances | | | (153,500) | | | — |
Preferred Stock Dividends Paid | | | (2,027) | | | (2,027) |
Stock Options Exercised | | | 627 | | | 65 |
Stock Repurchases | | | — | | | (9,162) |
Forfeiture of Restricted Stock Awards | | | — | | | (3) |
Shares Repurchased for Tax Withholdings Upon Vesting of Restricted Stock-Based Awards | | | (23) | | | (20) |
Net Cash Provided by Financing Activities | |
| 232,966 | |
| 344,569 |
| | | | | | |
NET CHANGE IN CASH AND CASH EQUIVALENTS | |
| 90,058 | |
| (69,956) |
Cash and Cash Equivalents Beginning | |
| 87,043 | |
| 143,473 |
Cash and Cash Equivalents Ending | | $ | 177,101 | | $ | 73,517 |
| | | | | | |
SUPPLEMENTAL CASH FLOW DISCLOSURE | |
| | |
| |
Cash Paid for Interest | | $ | 28,795 | | $ | 9,562 |
Cash Paid for Income Taxes | |
| 5,091 | |
| 7,955 |
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES | | | | | | |
Net Investment Securities Purchased but Not Settled | | $ | — | | $ | 8,738 |
| | | | | | |
| | Nine Months Ended | ||||
| | September 30, | ||||
| | 2023 | | 2022 | ||
CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | |
Net Income | | $ | 31,087 | | $ | 39,657 |
Adjustments to Reconcile Net Income to Net Cash | |
| | |
| |
Provided by Operating Activities: | |
| | |
| |
Net Amortization on Securities Available for Sale | |
| 196 | |
| 1,712 |
Net (Gain) Loss on Sales of Securities Available for Sale | |
| 6 | |
| (52) |
Provision for Credit Losses on Loans | |
| 2,050 | |
| 6,200 |
Credit for Off-Balance Sheet Exposures | | | (1,975) | | | — |
Depreciation of Premises and Equipment | |
| 1,901 | |
| 1,911 |
Amortization of Other Intangible Assets | |
| 91 | |
| 143 |
Amortization of Right-of Use Asset | | | 396 | | | — |
Amortization of Subordinated Debt Issuance Costs | | | 287 | | | 320 |
Stock-based Compensation | |
| 2,910 | |
| 2,557 |
Changes in Operating Assets and Liabilities: | |
| | |
| |
Accrued Interest Receivable and Other Assets | |
| (8,923) | |
| (7,859) |
Accrued Interest Payable and Other Liabilities | |
| 10,457 | |
| 35,780 |
Net Cash Provided by Operating Activities | |
| 38,483 | |
| 80,369 |
| | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES | |
| | |
| |
(Increase) Decrease in Bank-Owned Certificates of Deposit | |
| (44) | | | 694 |
Proceeds from Sales of Securities Available for Sale | |
| 26,976 | | | 25,066 |
Proceeds from Maturities, Paydowns, Payups and Calls of Securities Available for Sale | |
| 23,812 | | | 30,253 |
Purchases of Securities Available for Sale | |
| (63,777) | | | (210,432) |
Net Increase in Loans | |
| (155,123) | | | (560,786) |
Net Decrease (Increase) in FHLB Stock | |
| 2,550 | | | (10,361) |
Purchases of Premises and Equipment | |
| (2,787) | | | (1,457) |
Proceeds from Sales of Foreclosed Assets | |
| 116 | | | — |
Purchase of Bank-Owned Life Insurance | | | — | | | (7,407) |
Net Cash Used in Investing Activities | | | (168,277) | |
| (734,430) |
| | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES | |
| | |
| |
Net Increase in Deposits | |
| 258,966 | | | 358,837 |
Net (Decrease) Increase in Federal Funds Purchased | | | (287,000) | | | 212,000 |
Proceeds from FHLB Advances | |
| 486,500 | | | 29,000 |
Principal Payments on FHLB Advances | | | (289,000) | | | — |
Preferred Stock Dividends Paid | | | (3,040) | | | (3,040) |
Stock Options Exercised | | | 717 | | | 106 |
Stock Repurchases | | | — | | | (10,778) |
Forfeiture of Restricted Stock Awards | | | — | | | (3) |
Shares Repurchased for Tax Withholdings Upon Vesting of Restricted Stock-Based Awards | | | (34) | | | (38) |
Net Cash Provided by Financing Activities | |
| 167,109 | |
| 586,084 |
| | | | | | |
NET CHANGE IN CASH AND CASH EQUIVALENTS | |
| 37,315 | |
| (67,977) |
Cash and Cash Equivalents Beginning | |
| 87,043 | |
| 143,473 |
Cash and Cash Equivalents Ending | | $ | 124,358 | | $ | 75,496 |
| | | | | | |
SUPPLEMENTAL CASH FLOW DISCLOSURE | |
| | |
| |
Cash Paid for Interest | | $ | 82,670 | | $ | 16,905 |
Cash Paid for Income Taxes | |
| 8,931 | |
| 14,155 |
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES | | | | | | |
Net Investment Securities Purchased but Not Settled | | | 6,007 | | | 5,731 |
| | | | | | |
See accompanying notes to consolidated financial statements.
8
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 subsidiary of the Bank, for the purpose of holding repossessed property. In 2018, the Bank formed Bridgewater Investment Management, Inc., a wholly-owned subsidiary of the Bank, for the purpose of holding certain municipal securities and to engage in municipal lending activities.
Bridgewater Risk Management, Inc. was incorporated in December 2016 as a wholly-owned insurance company. 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 six-monthnine-month periods ended JuneSeptember 30, 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 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 elevated levels of inflation and possible recession, and changes in the financial condition of borrowers.
9
Material estimates that are particularly susceptible to significant change in the near term include the determination of the allowance for 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 $1.235 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 reversalrecovery 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
10
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. 1-4 family 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 1-4 family 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 include 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.
11
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 on loans 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
12
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 evaluations 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 reversalrecovery 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 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 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 troubled debt restructurings, or TDRs, 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 MarchOctober 2023, the Financial Accounting Standards Board (“FASB”) issued ASU 2023-06, Disclosure Improvements: Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative. This ASU was issued to clarify or improve disclosure and presentation requirements of a variety of topics, which will allow users to more easily compare entities subject to the SEC's existing disclosures with those entities that were not previously subject to the requirements, and align the requirements in the FASB accounting standard codification with the SEC's regulations. The Company is currently evaluating the provisions of the amendments and the impact on its future consolidated statements.
In March 2023, the FASB issued ASU 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 annual and interim periods beginning after December 15, 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 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
14
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, beginning after December 15, 2023. Early adoption is permitted in any interim period. The Company is assessing ASU 2023-02 and its impact on its accounting and disclosures.
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Subsequent Events
Subsequent events have been evaluated through August 3,November 2, 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 sixnine months ended JuneSeptember 30, 2023, stock options, restricted stock awards and restricted stock units of approximately 1,034,6001,152,100 and 896,3001,042,500 shares, respectively, were excluded from the calculation because they were deemed to be anti-dilutive. For the three and sixnine months ended JuneSeptember 30, 2022, stock options, restricted stock awards and restricted stock units of approximately 332,200 and 300,500 shares respectively, 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 sixnine months ended JuneSeptember 30, 2023 and 2022:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended | | Three Months Ended | | Nine Months Ended | ||||||||||||||||
| | June 30, | | June 30, | | September 30, | | September 30, | ||||||||||||||||
(dollars in thousands, except per share data) |
| 2023 |
| 2022 |
| 2023 |
| 2022 |
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||||||
Net Income Available to Common Shareholders | | $ | 8,802 | | $ | 11,868 | | $ | 19,431 | | $ | 23,117 | | $ | 8,616 | | $ | 13,500 | | $ | 28,047 | | $ | 36,617 |
Weighted Average Common Stock Outstanding: | | | | | | | | | | | | | | | | | | | | | | | | |
Weighted Average Common Stock Outstanding (Basic) | | | 27,886,425 | | | 27,839,260 | | | 27,807,100 | | | 27,980,749 | | | 27,943,409 | | | 27,520,117 | | | 27,853,036 | | | 27,825,517 |
Dilutive Effect of Stock Compensation | | | 312,314 | | | 964,582 | | | 543,605 | | | 1,011,031 | | | 368,369 | | | 1,072,737 | | | 486,816 | | | 1,057,184 |
Weighted Average Common Stock Outstanding (Dilutive) | | | 28,198,739 | | | 28,803,842 | | | 28,350,705 | | | 28,991,780 | | | 28,311,778 | | | 28,592,854 | | | 28,339,852 | | | 28,882,701 |
| | | | | | | | | | | | | | | | | | | | | | | | |
Basic Earnings per Common Share | | $ | 0.32 | | $ | 0.43 | | $ | 0.70 | | $ | 0.83 | | $ | 0.31 | | $ | 0.49 | | $ | 1.01 | | $ | 1.32 |
Diluted Earnings per Common Share | | | 0.31 | | | 0.41 | | | 0.69 | | | 0.80 | | | 0.30 | | | 0.47 | | | 0.99 | | | 1.27 |
Note 3: Securities
The following tables present the amortized cost and estimated fair value of securities with gross unrealized gains and losses at JuneSeptember 30, 2023 and December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2023 | | September 30, 2023 | ||||||||||||||||||||
| | | | | Gross | | Gross | | | | | | | | Gross | | Gross | | | | ||||
| | Amortized | | Unrealized | | Unrealized | | | | | Amortized | | Unrealized | | Unrealized | | | | ||||||
(dollars in thousands) |
| Cost |
| Gains |
| Losses |
| Fair Value |
| Cost |
| Gains |
| Losses |
| Fair Value | ||||||||
Securities Available for Sale: | | | | | | | | | | | | | | | | | | | | | | | | |
U.S. Treasury Securities | | $ | 2,273 | | $ | — | | $ | (24) | | $ | 2,249 | | $ | 2,883 | | $ | — | | $ | (19) | | $ | 2,864 |
Municipal Bonds | | | 148,771 | |
| — | |
| (21,410) | | | 127,361 | | | 148,725 | |
| — | |
| (26,228) | | | 122,497 |
Mortgage-Backed Securities | |
| 237,397 | |
| 1,788 | |
| (18,259) | |
| 220,926 | |
| 233,920 | |
| 137 | |
| (23,682) | |
| 210,375 |
Corporate Securities | |
| 127,570 | | | 40 | | | (14,264) | |
| 113,346 | |
| 134,369 | | | 268 | | | (12,920) | |
| 121,717 |
SBA Securities | |
| 21,477 | | | 325 | | | (116) | | | 21,686 | |
| 19,779 | | | 312 | | | (125) | | | 19,966 |
Asset-Backed Securities | | | 52,796 | | | 281 | | | (425) | | | 52,652 | | | 75,616 | | | 388 | | | (347) | | | 75,657 |
Total Securities Available for Sale | | $ | 590,284 | | $ | 2,434 | | $ | (54,498) | | $ | 538,220 | | $ | 615,292 | | $ | 1,105 | | $ | (63,321) | | $ | 553,076 |
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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 $236.2$164.3 million at JuneSeptember 30, 2023 were pledged to secure borrowing capacity. The securities portfolio was unencumbered at 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 JuneSeptember 30, 2023 and December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Less Than 12 Months | | 12 Months or Greater | | Total | | | | Less Than 12 Months | | 12 Months or Greater | | Total | ||||||||||||||||||||||||
| | Number of | | | | | Unrealized | | | | | Unrealized | | | | | Unrealized | | Number of | | | | | Unrealized | | | | | Unrealized | | | | | Unrealized | ||||||
(dollars in thousands, except number of holdings) |
| Holdings | | Fair Value |
| Losses |
| Fair Value |
| Losses |
| Fair Value |
| Losses |
| Holdings |
| Fair Value |
| Losses |
| Fair Value |
| Losses |
| Fair Value |
| Losses | ||||||||||||
June 30, 2023 | | | | | | | | | ||||||||||||||||||||||||||||||||
September 30, 2023 | September 30, 2023 | | | | | | | | | |||||||||||||||||||||||||||||||
U.S. Treasury Securities | | 6 | | $ | 882 | | $ | (4) | | $ | 1,368 | | $ | (20) | | $ | 2,250 | | $ | (24) | | 5 | | $ | 886 | | $ | (5) | | $ | 880 | | $ | (14) | | $ | 1,766 | | $ | (19) |
Municipal Bonds | | 216 | | | 24,069 | | | (1,009) | | | 102,012 | | | (20,401) | | | 126,081 | | | (21,410) | | 218 | | | 8,358 | | | (232) | | | 114,139 | | | (25,996) | | | 122,497 | | | (26,228) |
Mortgage-Backed Securities | | 133 | | | 70,485 | | | (2,212) | | | 112,979 | | | (16,047) | |
| 183,464 | |
| (18,259) | | 140 | | | 68,938 | | | (2,205) | | | 135,408 | | | (21,477) | |
| 204,346 | |
| (23,682) |
Corporate Securities | | 109 | | | 54,225 | | | (4,948) | | | 57,781 | | | (9,316) | |
| 112,006 | |
| (14,264) | | 109 | | | 18,899 | | | (1,024) | | | 94,731 | | | (11,896) | |
| 113,630 | |
| (12,920) |
SBA Securities | | 46 | | | 2,308 | | | (5) | | | 7,560 | | | (111) | |
| 9,868 | |
| (116) | | 47 | | | 2,319 | | | (6) | | | 6,811 | | | (119) | |
| 9,130 | |
| (125) |
Asset-Backed Securities | | 19 | | | 17,881 | | | (152) | | | 13,491 | | | (273) | | | 31,372 | | | (425) | | 16 | | | 17,215 | | | (130) | | | 14,173 | | | (217) | | | 31,388 | | | (347) |
Total Securities Available for Sale | | 529 | | $ | 169,850 | | $ | (8,330) | | $ | 295,191 | | $ | (46,168) | | $ | 465,041 | | $ | (54,498) | | 535 | | $ | 116,615 | | $ | (3,602) | | $ | 366,142 | | $ | (59,719) | | $ | 482,757 | | $ | (63,321) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Less Than 12 Months | | 12 Months or Greater | | Total | | | | Less Than 12 Months | | 12 Months or Greater | | Total | ||||||||||||||||||||||||
| | Number of | | | | | Unrealized | | | | | Unrealized | | | | | Unrealized | | Number of | | | | | Unrealized | | | | | Unrealized | | | | | Unrealized | ||||||
(dollars in thousands, except number of holdings) |
| Holdings | | Fair Value |
| Losses |
| Fair Value |
| Losses |
| Fair Value |
| Losses |
| Holdings |
| Fair Value |
| Losses |
| Fair Value |
| Losses |
| Fair Value |
| Losses | ||||||||||||
December 31, 2022 | December 31, 2022 | | | | | | | | | December 31, 2022 | | | | | | | | | ||||||||||||||||||||||
U.S. Treasury Securities | | 6 | | $ | 2,330 | | $ | (41) | | $ | — | | $ | — | | $ | 2,330 | | $ | (41) | | 6 | | $ | 2,330 | | $ | (41) | | $ | — | | $ | — | | $ | 2,330 | | $ | (41) |
Municipal Bonds | | 225 | | | 59,912 | | | (5,321) | | | 69,424 | | | (19,893) | | | 129,336 | | | (25,214) | | 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) | | 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) | | 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) | | 49 | | | 2,498 | | | (6) | | | 9,750 | | | (153) | |
| 12,248 | |
| (159) |
Asset-Backed Securities | | 20 | | | 21,919 | | | (396) | | | 6,186 | | | (224) | | | 28,105 | | | (620) | | 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) | | 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.
16
At JuneSeptember 30, 2023, 529535 debt securities had unrealized losses with aggregate depreciation of approximately 10.5%11.6% 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 JuneSeptember 30, 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$4.3 million at JuneSeptember 30, 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 JuneSeptember 30, 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 |
| Amortized Cost |
| Fair Value | ||||
June 30, 2023 | | | | | | | ||||||
September 30, 2023 | | | | | | | ||||||
Due in One Year or Less | | $ | 4,596 | | $ | 4,557 | | $ | 9,779 | | $ | 9,833 |
Due After One Year Through Five Years | |
| 37,163 | |
| 34,943 | |
| 44,811 | |
| 42,665 |
Due After Five Years Through 10 Years | |
| 170,689 | |
| 150,224 | |
| 179,590 | |
| 155,444 |
Due After 10 Years | |
| 66,166 | |
| 53,232 | |
| 51,797 | |
| 39,136 |
Subtotal | |
| 278,614 | |
| 242,956 | |
| 285,977 | |
| 247,078 |
Mortgage-Backed Securities | |
| 237,397 | |
| 220,926 | |
| 233,920 | |
| 210,375 |
SBA Securities | |
| 21,477 | |
| 21,686 | |
| 19,779 | |
| 19,966 |
Asset-Backed Securities | | | 52,796 | | | 52,652 | | | 75,616 | | | 75,657 |
Totals | | $ | 590,284 | | $ | 538,220 | | $ | 615,292 | | $ | 553,076 |
The following table presents a summary of the proceeds from sales of securities available for sale, as well as gross gains and losses, for the three and sixnine months ended JuneSeptember 30, 2023 and September 30, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended | | Three Months Ended | | Nine Months Ended | ||||||||||||||||
| | June 30, | | June 30, | | September 30, | | September 30, | ||||||||||||||||
(dollars in thousands) |
| 2023 |
| 2022 |
| 2023 |
| 2022 |
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||||||
Proceeds From Sales of Securities | | $ | 7,017 | | $ | 25,066 | | $ | 26,976 | | $ | 25,066 | | $ | — | | $ | — | | $ | 26,976 | | $ | 25,066 |
Gross Gains on Sales | |
| 50 | |
| 234 | |
| 247 | |
| 234 | |
| — | |
| — | |
| 247 | |
| 234 |
Gross Losses on Sales | |
| — | |
| (182) | |
| (253) | |
| (182) | |
| — | |
| — | |
| (253) | |
| (182) |
17
Note 4: Loans and Allowance for Credit Losses
The following table presents the components of the loan portfolio at JuneSeptember 30, 2023 and December 31, 2022:
| | | | | | | | | | | | |
| | June 30, | | December 31, | | September 30, | | December 31, | ||||
(dollars in thousands) |
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||
Commercial | | $ | 459,184 | | $ | 435,344 | | $ | 459,063 | | $ | 435,344 |
Paycheck Protection Program | | | 877 | | | 1,049 | | | 791 | | | 1,049 |
Construction and Land Development | |
| 351,069 | |
| 295,554 | |
| 294,818 | |
| 295,554 |
1-4 Family Construction | | | 69,648 | | | 70,242 | | | 64,463 | | | 70,242 |
Real Estate Mortgage: | |
| | |
| | |
| | |
| |
1-4 Family Mortgage | |
| 400,708 | |
| 355,474 | |
| 404,716 | |
| 355,474 |
Multifamily | |
| 1,314,524 | |
| 1,306,738 | |
| 1,378,669 | |
| 1,306,738 |
CRE Owner Occupied | | | 159,088 | | | 149,905 | | | 159,485 | | | 149,905 |
CRE Nonowner Occupied | | | 971,532 | | | 947,008 | | | 951,263 | | | 947,008 |
Total Real Estate Mortgage Loans | | | 2,845,852 | | | 2,759,125 | | | 2,894,133 | | | 2,759,125 |
Consumer and Other | | | 9,581 | | | 8,132 | | | 9,003 | | | 8,132 |
Total Loans, Gross | |
| 3,736,211 | |
| 3,569,446 | |
| 3,722,271 | |
| 3,569,446 |
Allowance for Credit Losses | |
| (50,701) | |
| (47,996) | |
| (50,585) | |
| (47,996) |
Net Deferred Loan Fees | |
| (7,718) | |
| (9,293) | |
| (7,222) | |
| (9,293) |
Total Loans, Net | | $ | 3,677,792 | | $ | 3,512,157 | | $ | 3,664,464 | | $ | 3,512,157 |
The following tables present the aging in past due loans and nonaccrual status, with and without an ACL, by loan segment as of JuneSeptember 30, 2023 and December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Accruing Interest | | | | | | | | | | | Accruing Interest | | | | | | | | | | ||||||||||||||
| | | | | 30-89 Days | | 90 Days or | | Nonaccrual | | Nonaccrual | | | | | | | | 30-89 Days | | 90 Days or | | Nonaccrual | | Nonaccrual | | | | ||||||||
(dollars in thousands) |
| Current |
| Past Due |
| More Past Due |
| with ACL |
| without ACL |
| Total |
| Current |
| Past Due |
| More Past Due |
| with ACL |
| without ACL |
| Total | ||||||||||||
June 30, 2023 | | | | | | | | | | | | | | | | | | | ||||||||||||||||||
September 30, 2023 | | | | | | | | | | | | | | | | | | | ||||||||||||||||||
Commercial | | $ | 459,108 | | $ | — | | $ | — | | $ | 76 | | $ | — | | $ | 459,184 | | $ | 458,883 | | $ | 11 | | $ | — | | $ | 74 | | $ | 95 | | $ | 459,063 |
Paycheck Protection Program | | | 877 | | | — | | | — | | | — | | | — | | | 877 | | | 791 | | | — | | | — | | | — | | | — | | | 791 |
Construction and Land Development | |
| 350,977 | | | — | | | — | | | — | | | 92 | |
| 351,069 | |
| 294,732 | | | — | | | — | | | — | | | 86 | |
| 294,818 |
1-4 Family Construction | | | 69,648 | | | — | | | — | | | — | | | — | | | 69,648 | | | 64,463 | | | — | | | — | | | — | | | — | | | 64,463 |
Real Estate Mortgage: | |
| | | | | | | | | | | | | | |
| | |
| | | | | | | | | | | | | | |
| |
1-4 Family Mortgage | |
| 400,708 | | | — | | | — | | | — | | | — | |
| 400,708 | |
| 404,716 | | | — | | | — | | | — | | | — | |
| 404,716 |
Multifamily | |
| 1,314,524 | | | — | | | — | | | — | | | — | |
| 1,314,524 | |
| 1,378,669 | | | — | | | — | | | — | | | — | |
| 1,378,669 |
CRE Owner Occupied | |
| 158,594 | | | — | | | — | | | — | | | 494 | |
| 159,088 | |
| 158,991 | | | — | | | — | | | — | | | 494 | |
| 159,485 |
CRE Nonowner Occupied | |
| 971,532 | | | — | | | — | | | — | | | — | |
| 971,532 | |
| 951,263 | | | — | | | — | | | — | | | — | |
| 951,263 |
Consumer and Other | |
| 9,581 | | | — | | | — | | | — | | | — | |
| 9,581 | |
| 9,003 | | | — | | | — | | | — | | | — | |
| 9,003 |
Totals | | $ | 3,735,549 | | $ | — | | $ | — | | $ | 76 | | $ | 586 | | $ | 3,736,211 | | $ | 3,721,511 | | $ | 11 | | $ | — | | $ | 74 | | $ | 675 | | $ | 3,722,271 |
18
| | | | | | | | | | | | | | | | | | |
| | 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 |
The Company aggregates loans into credit quality indicators based on relevant information about the ability of borrowers to service their debt by using internal reviews in which management monitors and analyzes the financial condition of borrowers and guarantors, trends in the industries in which the borrowers operate, and the fair values of collateral securing the loans. The Company analyzes all loans individually to assign a risk rating, grouped into five major categories defined as follows:
Pass: A pass loan is a credit with no known or existing potential weaknesses deserving of management’s close attention.
Watch: Loans classified as watch have a potential weakness that deserves management’s close attention. If left uncorrected, this potential weakness may result in deterioration of the repayment prospects for the loan or of the Company’s credit position at some future date. Watch loans are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification.
Substandard: Loans classified as substandard are not adequately protected by the current net worth and paying capacity of the borrower or of the collateral pledged, if any. Loans classified as substandard have a well-defined weakness or weaknesses that jeopardize the repayment of the debt. Well defined weaknesses include a borrower’s lack of marketability, inadequate cash flow or collateral support, failure to complete construction on time, or the failure to fulfill economic expectations. They are characterized by the distinct possibility that the Company will sustain loss if the deficiencies are not corrected.
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.
19
The following table presents loan balances classified by credit quality indicators by year of origination as of JuneSeptember 30, 2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ||||||
| | June 30, 2023 | | September 30, 2023 | ||||||||||||||||||||||||||||||||||||||||||
(dollars in thousands) | | 2023 | | | 2022 | | | 2021 | | | 2020 | | | 2019 | | | Prior | | | Revolving | | | Total | | 2023 | | | 2022 | | 2021 | | 2020 | | 2019 | | Prior | | Revolving | | Total | ||||||
Commercial | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ||||||
Pass | $ | 22,844 | | $ | 137,617 | | $ | 57,085 | | $ | 29,409 | | $ | 19,509 | | $ | 6,176 | | $ | 165,593 | | $ | 438,233 | $ | 47,507 | | $ | 141,694 | | $ | 39,407 | | $ | 25,556 | | $ | 19,018 | | $ | 4,735 | | $ | 160,955 | | $ | 438,872 |
Watch | | 27 | | | 627 | | | 41 | | | — | | | 5 | | | 1,864 | | | 2,213 | | | 4,777 | | 7 | | | 332 | | 38 | | — | | 3 | | 1,796 | | 2,184 | | 4,360 | ||||||
Substandard | | 76 | | | 11,525 | | | 13 | | | — | | | — | | | 79 | | | 4,481 | | | 16,174 | | 76 | | | 11,462 | | | 11 | | | — | | | — | | | 62 | | | 4,220 | | | 15,831 |
Total Commercial | | 22,947 | | | 149,769 | | | 57,139 | | | 29,409 | | | 19,514 | | | 8,119 | | | 172,287 | | | 459,184 | | 47,590 | | | 153,488 | | 39,456 | | 25,556 | | 19,021 | | 6,593 | | 167,359 | | 459,063 | ||||||
Current Period Gross Write-offs | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | 96 | | | — | | — | | — | | — | | — | | — | | 96 | ||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ||||||
Paycheck Protection Program | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ||||||
Pass | | — | | | — | | | 877 | | | — | | | — | | | — | | | — | | | 877 | | — | | | — | | | 791 | | | — | | | — | | | — | | | — | | | 791 |
Total Paycheck Protection Program | | — | | | — | | | 877 | | | — | | | — | | | — | | | — | | | 877 | | — | | | — | | 791 | | — | | — | | — | | — | | 791 | ||||||
Current Period Gross Write-offs | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | — | | | — | | — | | — | | — | | — | | — | | — | ||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ||||||
Construction and Land Development | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ||||||
Pass | | 33,825 | | | 215,316 | | | 82,209 | | | 5,153 | | | — | | | 96 | | | 12,670 | | | 349,269 | | 37,814 | | | 194,143 | | 48,288 | | 5,021 | | — | | 91 | | 9,375 | | 294,732 | ||||||
Watch | | 1,708 | | | — | | | — | | | — | | | — | | | — | | | — | | | 1,708 | |||||||||||||||||||||||
Substandard | | — | | | 92 | | | — | | | — | | | — | | | — | | | — | | | 92 | | — | | | 86 | | | — | | | — | | | — | | | — | | | — | | | 86 |
Total Construction and Land Development | | 35,533 | | | 215,408 | | | 82,209 | | | 5,153 | | | — | | | 96 | | | 12,670 | | | 351,069 | | 37,814 | | | 194,229 | | 48,288 | | 5,021 | | — | | 91 | | 9,375 | | 294,818 | ||||||
Current Period Gross Write-offs | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | — | | | — | | — | | — | | — | | — | | — | | — | ||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ||||||
1-4 Family Construction | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ||||||
Pass | | 30,980 | | | 16,140 | | | 942 | | | 331 | | | — | | | — | | | 21,255 | | | 69,648 | | 33,966 | | | 13,594 | | | 935 | | | 358 | | | — | | | — | | | 15,610 | | | 64,463 |
Total 1-4 Family Construction | | 30,980 | | | 16,140 | | | 942 | | | 331 | | | — | | | — | | | 21,255 | | | 69,648 | | 33,966 | | | 13,594 | | 935 | | 358 | | — | | — | | 15,610 | | 64,463 | ||||||
Current Period Gross Write-offs | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | — | | | — | | — | | — | | — | | — | | — | | — | ||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ||||||
Real Estate Mortgage: | | | | | | | | | | | | | | | | | | | | | | | — | | | | | | | | | | | | | | | | | — | ||||||
1-4 Family Mortgage | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ||||||
Pass | | 42,641 | | | 119,068 | | | 91,113 | | | 57,846 | | | 19,569 | | | 7,664 | | | 61,869 | | | 399,770 | | 61,412 | | | 109,495 | | 87,381 | | 55,250 | | 19,059 | | 4,880 | | 66,575 | | 404,052 | ||||||
Watch | | — | | | — | | | — | | | — | | | — | | | 670 | | | — | | | 670 | | — | | | — | | — | | — | | — | | 1 | | — | | 1 | ||||||
Substandard | | — | | | — | | | — | | | 268 | | | — | | | — | | | — | | | 268 | | — | | | — | | | — | | | — | | | — | | | 663 | | | — | | | 663 |
Total 1-4 Family Mortgage | | 42,641 | | | 119,068 | | | 91,113 | | | 58,114 | | | 19,569 | | | 8,334 | | | 61,869 | | | 400,708 | | 61,412 | | | 109,495 | | 87,381 | | 55,250 | | 19,059 | | 5,544 | | 66,575 | | 404,716 | ||||||
Current Period Gross Write-offs | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | — | | | — | | — | | — | | — | | — | | — | | — | ||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ||||||
Multifamily | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ||||||
Pass | | 97,776 | | | 391,007 | | | 455,044 | | | 266,810 | | | 42,635 | | | 49,126 | | | 8,884 | | | 1,311,282 | | 136,071 | | | 437,174 | | 473,938 | | 230,980 | | 42,344 | | 46,635 | | 8,598 | | 1,375,740 | ||||||
Watch | | — | | | — | | | 3,242 | | | — | | | — | | | — | | | — | | | 3,242 | | 2,929 | | | — | | | — | | | — | | | — | | | — | | | — | | | 2,929 |
Total Multifamily | | 97,776 | | | 391,007 | | | 458,286 | | | 266,810 | | | 42,635 | | | 49,126 | | | 8,884 | | | 1,314,524 | | 139,000 | | | 437,174 | | 473,938 | | 230,980 | | 42,344 | | 46,635 | | 8,598 | | 1,378,669 | ||||||
Current Period Gross Write-offs | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | — | | | — | | — | | — | | — | | — | | — | | — | ||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ||||||
CRE Owner Occupied | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ||||||
Pass | | 27,446 | | | 50,665 | | | 41,675 | | | 21,028 | | | 5,242 | | | 10,586 | | | 869 | | | 157,511 | | 31,090 | | | 48,727 | | 41,274 | | 20,827 | | 5,076 | | 9,728 | | 1,194 | | 157,916 | ||||||
Substandard | | 204 | | | — | | | 494 | | | — | | | — | | | 879 | | | — | | | 1,577 | | 200 | | | — | | | 494 | | | — | | | — | | | 875 | | | — | | | 1,569 |
Total CRE Owner Occupied | | 27,650 | | | 50,665 | | | 42,169 | | | 21,028 | | | 5,242 | | | 11,465 | | | 869 | | | 159,088 | | 31,290 | | | 48,727 | | 41,768 | | 20,827 | | 5,076 | | 10,603 | | 1,194 | | 159,485 | ||||||
Current Period Gross Write-offs | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | — | | | — | | — | | — | | — | | — | | — | | — | ||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ||||||
CRE Nonowner Occupied | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ||||||
Pass | | 101,088 | | | 314,651 | | | 274,761 | | | 93,790 | | | 79,301 | | | 69,196 | | | 6,217 | | | 939,004 | | 123,283 | | | 297,158 | | 256,990 | | 84,384 | | 78,708 | | 68,128 | | 5,553 | | 914,204 | ||||||
Watch | | 712 | | | 12,178 | | | 3,928 | | | — | | | — | | | — | | | — | | | 16,818 | | 6,176 | | | 10,173 | | 3,238 | | — | | — | | — | | — | | 19,587 | ||||||
Substandard | | 9,872 | | | 2,528 | | | — | | | — | | | 3,310 | | | — | | | — | | | 15,710 | | 9,780 | | | 4,408 | | | — | | | — | | | 3,284 | | | — | | | — | | | 17,472 |
Total CRE Nonowner Occupied | | 111,672 | | | 329,357 | | | 278,689 | | | 93,790 | | | 82,611 | | | 69,196 | | | 6,217 | | | 971,532 | | 139,239 | | | 311,739 | | 260,228 | | 84,384 | | 81,992 | | 68,128 | | 5,553 | | 951,263 | ||||||
Current Period Gross Write-offs | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | — | | | — | | — | | — | | — | | — | | — | | — | ||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total Real Estate Mortgage Loans | | 279,739 | | | 890,097 | | | 870,257 | | | 439,742 | | | 150,057 | | | 138,121 | | | 77,839 | | | 2,845,852 | | 370,941 | | | 907,135 | | 863,315 | | 391,441 | | 148,471 | | 130,910 | | 81,920 | | 2,894,133 | ||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ||||||
Consumer and Other | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ||||||
Pass | | 2,733 | | | 353 | | | 12 | | | 1,544 | | | 15 | | | — | | | 4,924 | | | 9,581 | | 2,744 | | | 290 | | | 10 | | | 1,501 | | | 11 | | | — | | | 4,447 | | | 9,003 |
Total Consumer and Other | | 2,733 | | | 353 | | | 12 | | | 1,544 | | | 15 | | | — | | | 4,924 | | | 9,581 | | 2,744 | | | 290 | | 10 | | 1,501 | | 11 | | — | | 4,447 | | 9,003 | ||||||
Current Period Gross Write-offs | | 1 | | | — | | | — | | | — | | | — | | | — | | | 6 | | | 7 | | 2 | | | — | | — | | — | | — | | — | | 31 | | 33 | ||||||
| | | | | | | | | | | | | | | | | | | | | | | — | | | | | | | | | | | | | | | | | | | | | | | |
Total Period Gross Write-offs | | 1 | | | — | | | — | | | — | | | — | | | — | | | 6 | | | 7 | | 98 | | | — | | | — | | | — | | | — | | | — | | | 31 | | | 129 |
Total Loans | $ | 371,932 | | $ | 1,271,767 | | $ | 1,011,436 | | $ | 476,179 | | $ | 169,586 | | $ | 146,336 | | $ | 288,975 | | $ | 3,736,211 | $ | 493,055 | | $ | 1,268,736 | | $ | 952,795 | | $ | 423,877 | | $ | 167,503 | | $ | 137,594 | | $ | 278,711 | | $ | 3,722,271 |
20
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 activity in the allowance for credit losses, by segment, for the three and sixnine months ended JuneSeptember 30, 2023. On January 1, 2023, the Company adopted CECL, which added $650,000 to the total ACL. Under CECL, the Company recorded a $550,000$0 and $2.1 million provision for credit losses on loans during the three and sixnine months ended JuneSeptember 30, 2023, respectively, compared to a $3.0$1.5 million and $4.7$6.2 million provision for loan losses in the three and sixnine months ended JuneSeptember 30, 2022, respectively, under the incurred loss method.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Paycheck | | Construction | | | | | | | | | CRE | | CRE | | | | | | | | | | | | | Paycheck | | Construction | | | | | | | | | CRE | | CRE | | | | | | | | | ||||||||||||||
| | | | | Protection | | and Land | | 1-4 Family | | 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 |
| Construction |
| Mortgage |
| Multifamily |
| Occupied |
| Occupied |
| and Other |
| Unallocated |
| Total |
| Commercial |
| Program |
| Development |
| Construction |
| Mortgage |
| Multifamily |
| Occupied |
| Occupied |
| and Other |
| Unallocated |
| Total | ||||||||||||||||||||||
Three Months Ended June 30, 2023 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||||||||||||||||
Allowance for Credit Losses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||||||||||||||||
Three Months Ended September 30, 2023 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||||||||||||||||
Allowance for Credit Losses for Loans: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||||||||||||||||
Beginning Balance | | $ | 5,566 | | $ | — | | $ | 3,169 | | | 806 | | $ | 2,717 | | $ | 20,989 | | $ | 1,083 | | $ | 15,744 | | $ | 74 | | $ | — | | $ | 50,148 | | $ | 5,439 | | $ | — | | $ | 3,476 | | $ | 654 | | $ | 2,836 | | $ | 21,164 | | $ | 1,086 | | $ | 15,976 | | $ | 70 | | $ | — | | $ | 50,701 |
Provision for Credit Losses | | | (129) | | | — | | | 307 | | | (152) | | | 118 | | | 175 | | | 3 | | | 232 | | | (4) | | | — | |
| 550 | |||||||||||||||||||||||||||||||||
Provision for Credit Losses for Loans | | | 151 | | | — | | | (704) | | | (80) | | | 22 | | | 1,052 | | | 3 | | | (464) | | | 20 | | | — | |
| — | |||||||||||||||||||||||||||||||||
Loans Charged-off | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (3) | | | — | |
| (3) | | | (96) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (26) | | | — | |
| (122) |
Recoveries of Loans | | | 2 | | | — | | | — | | | — | | | 1 | | | — | | | — | | | — | | | 3 | | | — | |
| 6 | | | 2 | | | — | | | — | | | — | | | 2 | | | — | | | — | | | — | | | 2 | | | — | |
| 6 |
Total Ending Allowance Balance | | $ | 5,439 | | $ | — | | $ | 3,476 | | $ | 654 | | $ | 2,836 | | $ | 21,164 | | $ | 1,086 | | $ | 15,976 | | $ | 70 | | $ | — | | $ | 50,701 | | $ | 5,496 | | $ | — | | $ | 2,772 | | $ | 574 | | $ | 2,860 | | $ | 22,216 | | $ | 1,089 | | $ | 15,512 | | $ | 66 | | $ | — | | $ | 50,585 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Six Months Ended June 30, 2023 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||||||||||||||||
Allowance for Credit Losses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||||||||||||||||
Nine Months Ended September 30, 2023 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||||||||||||||||
Allowance for Credit Losses for Loans: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||||||||||||||||
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 | | $ | 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 | | | (1,157) | | | (1) | | | (1,070) | | | (235) | | | (1,778) | | | 3,318 | | | (943) | | | 2,869 | | | (90) | | | (263) | | | 650 |
Provision for Credit Losses | | | 91 | | | — | | | 635 | | | 44 | | | 287 | | | 387 | | | 64 | | | 531 | | | 11 | | | — | |
| 2,050 | |||||||||||||||||||||||||||||||||
Provision for Credit Losses for Loans | | | 242 | | | — | | | (69) | | | (36) | | | 309 | | | 1,439 | | | 67 | | | 67 | | | 31 | | | — | |
| 2,050 | |||||||||||||||||||||||||||||||||
Loans Charged-off | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (7) | | | — | |
| (7) | | | (96) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (33) | | | — | |
| (129) |
Recoveries of Loans | | | 5 | | | — | | | — | | | — | | | 2 | | | — | | | — | | | — | | | 5 | | | — | |
| 12 | | | 7 | | | — | | | — | | | — | | | 4 | | | — | | | — | | | — | | | 7 | | | — | |
| 18 |
Total Ending Allowance Balance | | $ | 5,439 | | $ | — | | $ | 3,476 | | $ | 654 | | $ | 2,836 | | $ | 21,164 | | $ | 1,086 | | $ | 15,976 | | $ | 70 | | $ | — | | $ | 50,701 | | $ | 5,496 | | $ | — | | $ | 2,772 | | $ | 574 | | $ | 2,860 | | $ | 22,216 | | $ | 1,089 | | $ | 15,512 | | $ | 66 | | $ | — | | $ | 50,585 |
21
The following table presents the activity in the allowance for loan losses by portfolio segment for the three and sixnine months ended JuneSeptember 30, 2022, 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 | | 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 |
| Construction |
| Mortgage |
| Multifamily |
| Occupied |
| Occupied |
| and Other |
| Unallocated |
| Total |
| Commercial |
| Program |
| Development |
| Construction |
| Mortgage |
| Multifamily |
| Occupied |
| Occupied |
| and Other |
| Unallocated |
| Total | ||||||||||||||||||||||
Three Months Ended June 30, 2022 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ||||||||||||||||||||||||||||||||||
Three Months Ended September 30, 2022 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||||||||||||||||
Allowance for Loan Losses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Beginning Balance | | $ | 5,638 | | $ | 6 | | $ | 3,707 | | | 612 | | $ | 3,885 | | $ | 14,083 | | $ | 1,595 | | $ | 11,663 | | $ | 177 | | $ | 326 | | $ | 41,692 | | $ | 6,275 | | $ | 2 | | $ | 4,134 | | $ | 638 | | $ | 4,206 | | $ | 14,977 | | $ | 1,920 | | $ | 12,235 | | $ | 154 | | $ | 170 | | $ | 44,711 |
Provision for Loan Losses | |
| 648 | | | (4) | | | 427 | | | 26 | | | 319 | | 894 | | | 325 | | | 572 | | | (26) | | | (156) | |
| 3,025 | |
| 70 | | | (1) | | | (363) | | | 60 | | | (257) | | | 1,845 | | | 107 | | | 47 | | | 13 | | | (21) | |
| 1,500 | |
Loans Charged-off | |
| (13) | | | — | | | — | | | — | | | — | | — | | | — | | | — | | | (1) | | | — | |
| (14) | |
| — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (5) | | | — | |
| (5) | |
Recoveries of Loans | |
| 2 | | | — | | | — | | | — | | | 2 | | | — | | | — | | | — | | | 4 | | | — | |
| 8 | |
| 3 | | | — | | | — | | | — | | | 281 | | | — | | | — | | | — | | | 1 | | | — | |
| 285 |
Total Ending Allowance Balance | | $ | 6,275 | | $ | 2 | | $ | 4,134 | | $ | 638 | | $ | 4,206 | | $ | 14,977 | | $ | 1,920 | | $ | 12,235 | | $ | 154 | | $ | 170 | | $ | 44,711 | | $ | 6,348 | | $ | 1 | | $ | 3,771 | | $ | 698 | | $ | 4,230 | | $ | 16,822 | | $ | 2,027 | | $ | 12,282 | | $ | 163 | | $ | 149 | | $ | 46,491 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Six Months Ended June 30, 2022 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ||||||||||||||||||||||||||||||||||
Nine Months Ended September 30, 2022 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||||||||||||||||
Allowance for Loan Losses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Beginning Balance | | $ | 6,256 | | $ | 13 | | $ | 3,139 | | | 618 | | $ | 3,757 | | $ | 12,610 | | $ | 1,495 | | $ | 11,335 | | $ | 147 | | $ | 650 | | $ | 40,020 | | $ | 6,256 | | $ | 13 | | $ | 3,139 | | $ | 618 | | $ | 3,757 | | $ | 12,610 | | $ | 1,495 | | $ | 11,335 | | $ | 147 | | $ | 650 | | $ | 40,020 |
Provision for Loan Losses | |
| 28 | | | (11) | | | 995 | | | 20 | | | 444 | | 2,367 | | | 425 | | | 900 | | | 12 | | | (480) | |
| 4,700 | |
| 98 | | | (12) | | | 632 | | | 80 | | | 187 | | | 4,212 | | | 532 | | | 947 | | | 25 | | | (501) | |
| 6,200 | |
Loans Charged-off | |
| (13) | | | — | | | — | | | — | | | — | | — | | | — | | | — | | | (16) | | | — | |
| (29) | |
| (13) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (21) | | | — | |
| (34) | |
Recoveries of Loans | |
| 4 | | | — | | | — | | | — | | | 5 | | | — | | | — | | | — | | | 11 | | | — | |
| 20 | |
| 7 | | | — | | | — | | | — | | | 286 | | | — | | | — | | | — | | | 12 | | | — | |
| 305 |
Total Ending Allowance Balance | | $ | 6,275 | | $ | 2 | | $ | 4,134 | | $ | 638 | | $ | 4,206 | | $ | 14,977 | | $ | 1,920 | | $ | 12,235 | | $ | 154 | | $ | 170 | | $ | 44,711 | | $ | 6,348 | | $ | 1 | | $ | 3,771 | | $ | 698 | | $ | 4,230 | | $ | 16,822 | | $ | 2,027 | | $ | 12,282 | | $ | 163 | | $ | 149 | | $ | 46,491 |
The following tables present the balance in the allowance for credit losses and the recorded investment in loans, by segment, based on impairment method as of JuneSeptember 30, 2023 and December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Paycheck | | Construction | | | | | | | | | | CRE | | CRE | | | | | | | | | | | | | Paycheck | | Construction | | | | | | | | | | CRE | | CRE | | | | | | | | | | ||||||||||||
| | | | Protection | | and Land | | 1-4 Family | | 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 |
| Construction |
| Mortgage |
| Multifamily |
| Occupied |
| Occupied |
| and Other |
| Unallocated |
| Total |
| Commercial |
| Program |
| Development |
| Construction |
| Mortgage |
| Multifamily |
| Occupied |
| Occupied |
| and Other |
| Unallocated |
| Total | ||||||||||||||||||||||
ACL at June 30, 2023 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||||||||||||||||
ACL at September 30, 2023 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||||||||||||||||
Individually Evaluated for Impairment | | $ | 75 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 75 | | $ | 84 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 84 |
Collectively Evaluated for Impairment | | | 5,364 | | | — | | | 3,476 | | | 654 | | | 2,836 | | | 21,164 | | | 1,086 | | | 15,976 | | | 70 | | | — | |
| 50,626 | | | 5,412 | | | — | | | 2,772 | | | 574 | | | 2,860 | | | 22,216 | | | 1,089 | | | 15,512 | | | 66 | | | — | |
| 50,501 |
Totals | | $ | 5,439 | | $ | — | | $ | 3,476 | | $ | 654 | | $ | 2,836 | | $ | 21,164 | | $ | 1,086 | | $ | 15,976 | | $ | 70 | | $ | — | | $ | 50,701 | | $ | 5,496 | | $ | — | | $ | 2,772 | | $ | 574 | | $ | 2,860 | | $ | 22,216 | | $ | 1,089 | | $ | 15,512 | | $ | 66 | | $ | — | | $ | 50,585 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
ALL at December 31, 2022 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Individually Evaluated for Impairment | | $ | 71 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 71 | | $ | 71 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 71 |
Collectively Evaluated for Impairment | |
| 6,429 | | | 1 | | | 3,911 | | | 845 | | | 4,325 | | | 17,459 | | | 1,965 | | | 12,576 | | | 151 | | | 263 | |
| 47,925 | |
| 6,429 | | | 1 | | | 3,911 | | | 845 | | | 4,325 | | | 17,459 | | | 1,965 | | | 12,576 | | | 151 | | | 263 | |
| 47,925 |
Totals | | $ | 6,500 | | $ | 1 | | $ | 3,911 | | $ | 845 | | $ | 4,325 | | $ | 17,459 | | $ | 1,965 | | $ | 12,576 | | $ | 151 | | $ | 263 | | $ | 47,996 | | $ | 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 | | 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 |
| Construction |
| Mortgage |
| Multifamily |
| Occupied |
| Occupied |
| and Other |
| Total |
| Commercial |
| Program |
| Development |
| Construction |
| Mortgage |
| Multifamily |
| Occupied |
| Occupied |
| and Other |
| Total | ||||||||||||||||||||
Loans at June 30, 2023 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ||||||||||||||||||||||||||||||
Loans at September 30, 2023 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ||||||||||||||||||||||||||||||
Individually Evaluated for Impairment | | $ | 16,174 | | $ | — | | $ | 92 | | $ | — | | $ | 268 | | $ | — | | $ | 1,577 | | $ | 15,710 | | $ | — | | $ | 33,821 | | $ | 15,831 | | $ | — | | $ | 86 | | $ | — | | $ | 663 | | $ | — | | $ | 1,569 | | $ | 17,472 | | $ | — | | $ | 35,621 |
Collectively Evaluated for Impairment | |
| 443,010 | | | 877 | | | 350,977 | | | 69,648 | | | 400,440 | | | 1,314,524 | | | 157,511 | | | 955,822 | | | 9,581 | |
| 3,702,390 | |
| 443,232 | | | 791 | | | 294,732 | | | 64,463 | | | 404,053 | | | 1,378,669 | | | 157,916 | | | 933,791 | | | 9,003 | |
| 3,686,650 |
Totals | | $ | 459,184 | | $ | 877 | | $ | 351,069 | | $ | 69,648 | | $ | 400,708 | | $ | 1,314,524 | | $ | 159,088 | | $ | 971,532 | | $ | 9,581 | | $ | 3,736,211 | | $ | 459,063 | | $ | 791 | | $ | 294,818 | | $ | 64,463 | | $ | 404,716 | | $ | 1,378,669 | | $ | 159,485 | | $ | 951,263 | | $ | 9,003 | | $ | 3,722,271 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Loans at December 31, 2022 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Individually Evaluated for Impairment | | $ | 19,675 | | $ | — | | $ | 106 | | $ | — | | $ | 392 | | $ | — | | $ | 1,637 | | $ | 6,239 | | $ | — | | $ | 28,049 | | $ | 19,675 | | $ | — | | $ | 106 | | $ | — | | $ | 392 | | $ | — | | $ | 1,637 | | $ | 6,239 | | $ | — | | $ | 28,049 |
Collectively Evaluated for Impairment | |
| 415,669 | | | 1,049 | | | 295,448 | | | 70,242 | | | 355,082 | | | 1,306,738 | | | 148,268 | | | 940,769 | | | 8,132 | |
| 3,541,397 | |
| 415,669 | | | 1,049 | | | 295,448 | | | 70,242 | | | 355,082 | | | 1,306,738 | | | 148,268 | | | 940,769 | | | 8,132 | |
| 3,541,397 |
Totals | | $ | 435,344 | | $ | 1,049 | | $ | 295,554 | | $ | 70,242 | | $ | 355,474 | | $ | 1,306,738 | | $ | 149,905 | | $ | 947,008 | | $ | 8,132 | | $ | 3,569,446 | | $ | 435,344 | | $ | 1,049 | | $ | 295,554 | | $ | 70,242 | | $ | 355,474 | | $ | 1,306,738 | | $ | 149,905 | | $ | 947,008 | | $ | 8,132 | | $ | 3,569,446 |
22
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 JuneSeptember 30, 2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Primary Type of Collateral | | | | | | | | Primary Type of Collateral | | | | | | | ||||||||||||||
| | | | | Business | | | | | | | ACL | | | | | Business | | | | | | | ACL | ||||||
(dollars in thousands) |
| Real Estate |
| Assets |
| Other |
| Total |
| Allocation |
| Real Estate |
| Assets |
| Other |
| Total |
| Allocation | ||||||||||
June 30, 2023 | | | | | | | | | | | | | | | | |||||||||||||||
September 30, 2023 | | | | | | | | | | | | | | | | |||||||||||||||
Commercial | | $ | — | | $ | 5,801 | | $ | 10,373 | | $ | 16,174 | | $ | 75 | | $ | — | | $ | 5,459 | | $ | 10,372 | | $ | 15,831 | | $ | 84 |
Construction and Land Development | |
| 92 | | | — | | | — | | | 92 | | | — | |
| 86 | | | — | | | — | | | 86 | | | — |
Real Estate Mortgage: | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
1-4 Family Mortgage | |
| 268 | | | — | | | — | | | 268 | | | — | |
| 663 | | | — | | | — | | | 663 | | | — |
CRE Owner Occupied | |
| 1,577 | | | — | | | — | | | 1,577 | | | — | |
| 1,569 | | | — | | | — | | | 1,569 | | | — |
CRE Nonowner Occupied | |
| 15,710 | | | — | | | — | | | 15,710 | | | — | |
| 17,472 | | | — | | | — | | | 17,472 | | | — |
Totals | | $ | 17,647 | | $ | 5,801 | | $ | 10,373 | | $ | 33,821 | | $ | 75 | | $ | 19,790 | | $ | 5,459 | | $ | 10,372 | | $ | 35,621 | | $ | 84 |
Accrued interest receivable on loans, which is recorded within accrued interest on the balance sheet, totaled $10.0$10.8 million at JuneSeptember 30, 2023, and was excluded from the estimate of credit losses.
Effective January 1, 2023, the Company adopted the provision of ASU 2022-02, which eliminated the accounting for TDRs, while expanding loan modification and vintage disclosure requirements. For the three months ended JuneSeptember 30, 2023, there were no loan modifications. For the sixnine months ended JuneSeptember 30, 2023, the Company modified one CRE nonowner occupied loan, with an outstanding balance of $9.8$9.6 million, for a borrower experiencing financial difficulty by granting a 12-month extension at a below market rate. There was no forgiveness of principal and this loan was current with its modified terms as of JuneSeptember 30, 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 December 31, 2022:
| | | | | | | | | |
| | December 31, 2022 | |||||||
| | Recorded | | Principal | | Related | |||
(dollars in thousands) |
| Investment |
| Balance |
| Allowance | |||
Loans With No Related Allowance for Loan Losses: |
| | | | | | | | |
Commercial | | $ | 19,508 | | $ | 19,508 | | $ | — |
Construction and Land Development | | | 106 | | | 713 | | | — |
Real Estate Mortgage: | |
| | |
| | |
| |
1-4 Family Mortgage | |
| 392 | | | 392 | |
| — |
CRE Owner Occupied | |
| 1,637 | |
| 1,726 | |
| — |
CRE Nonowner Occupied | | | 6,239 | | | 6,239 | | | — |
Totals | |
| 27,882 | |
| 28,578 | |
| — |
| | | | | | | | | |
Loans With An Allowance for Loan Losses: | | | | |
|
| |
|
|
Commercial | |
| 167 | | | 167 | | | 71 |
Totals | |
| 167 | |
| 167 | |
| 71 |
Grand Totals | | $ | 28,049 | | $ | 28,745 | | $ | 71 |
23
The following table presents information regarding the average balances and interest income recognized on impaired loans by loan segment for the three and sixnine months ended JuneSeptember 30, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended | | Three Months Ended | | Nine Months Ended | ||||||||||||||||
| | June 30, 2022 | | June 30, 2022 | | September 30, 2022 | | September 30, 2022 | ||||||||||||||||
| | Average | | Interest | | Average | | Interest | | Average | | Interest | | Average | | Interest | ||||||||
(dollars in thousands) | | Investment |
| Recognized | | Investment |
| Recognized | | Investment |
| Recognized | | Investment |
| Recognized | ||||||||
Loans With No Related Allowance for Loan Losses: | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial | | $ | 11,156 | | $ | 154 | | $ | 12,074 | | $ | 331 | | $ | 9,929 | | $ | 187 | | $ | 11,343 | | $ | 519 |
Construction and Land Development | | | 120 | | | — | | | 123 | | | — | | | 114 | | | — | | | 120 | | | — |
Real Estate Mortgage: | | | | | | | | | | | | | | | | | | | | | | | | |
1st REM - 1-4 Family | | | 286 | | | 4 | | | 288 | | | 7 | | | 282 | | | 4 | | | 286 | | | 11 |
CRE Owner Occupied | | | 1,765 | | | 16 | | | 1,768 | | | 33 | | | 1,751 | | | 17 | | | 1,762 | | | 49 |
CRE Nonowner Occupied | | | 2,970 | | | 38 | | | 2,987 | | | 75 | | | 6,333 | | | 85 | | | 6,431 | | | 249 |
Totals | |
| 16,297 | |
| 212 | |
| 17,240 | |
| 446 | |
| 18,409 | |
| 293 | |
| 19,942 | |
| 828 |
| | | | | | | | | | | | | | | | | | | | | | | | |
Loans With An Allowance for Loan Losses: | |
|
| |
| | |
|
| |
| | |
|
| |
| | |
|
| |
| |
Commercial | | | 85 | | | — | | | 86 | | | 1 | | | 84 | | | — | | | 86 | | | 1 |
Real Estate Mortgage: | | | | | | | | | | | | | | | | | | | | | | | | |
CRE Nonowner Occupied | | | 12,136 | | | 123 | | | 12,136 | | | 244 | | | 12,135 | | | 127 | | | 12,135 | | | 370 |
Totals | |
| 12,221 | |
| 123 | |
| 12,222 | |
| 245 | |
| 12,219 | |
| 127 | |
| 12,221 | |
| 371 |
Grand Totals | | $ | 28,518 | | $ | 335 | | $ | 29,462 | | $ | 691 | | $ | 30,628 | | $ | 420 | | $ | 32,163 | | $ | 1,199 |
Note 5: Deposits
The following table presents the composition of deposits at JuneSeptember 30, 2023 and December 31, 2022:
| | | | | | | | | | | | |
| | June 30, | | December 31, | | September 30, | | December 31, | ||||
(dollars in thousands) |
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||
Transaction Deposits | | $ | 1,470,705 | | $ | 1,336,264 | | $ | 1,535,160 | | $ | 1,336,264 |
Savings and Money Market Deposits | |
| 860,613 | |
| 1,031,873 | |
| 872,534 | |
| 1,031,873 |
Time Deposits | |
| 271,783 | |
| 272,253 | |
| 265,737 | |
| 272,253 |
Brokered Deposits | |
| 974,831 | |
| 776,153 | |
| 1,002,078 | |
| 776,153 |
Totals | | $ | 3,577,932 | | $ | 3,416,543 | | $ | 3,675,509 | | $ | 3,416,543 |
Brokered deposits are comprised of brokered transaction and money market accounts of $163.3$177.7 million and $184.3 million as of JuneSeptember 30, 2023 and December 31, 2022, respectively.
The following table presents the scheduled maturities of brokered and customer time deposits at JuneSeptember 30, 2023:
| | | | | | |
| | June 30, | | September 30, | ||
(dollars in thousands) |
| 2023 |
| 2023 | ||
Less than 1 Year | | $ | 428,409 | | $ | 397,981 |
1 to 2 Years | | | 147,953 | | | 143,267 |
2 to 3 Years | | | 362,979 | | | 350,978 |
3 to 4 Years | | | 50,437 | | | 63,790 |
4 to 5 Years | | | 76,781 | | | 101,357 |
Greater than 5 Years | | | 16,730 | | | 32,709 |
Totals | | $ | 1,083,289 | | $ | 1,090,082 |
The aggregate amount of time deposits greater than $250,000 was approximately $88.1$88.5 million and $92.3 million at JuneSeptember 30, 2023 and December 31, 2022, respectively.
24
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. financial institutions in order to minimize the risk to the Company. These swaps are derivatives, but are not designated as hedging instruments.
Interest rate swap contracts involve the risk of dealing with counterparties and their ability to meet contractual terms. When the fair value of a derivative instrument contract is positive, this generally indicates that the counterparty or client owes the Company, and results in credit risk to the Company. When the fair value of a derivative instrument contract is negative, the Company owes the client or counterparty and therefore, the Company has no credit risk.
The following table presents a summary of the Company’s interest rate swaps to facilitate customer transactions as of JuneSeptember 30, 2023 and December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2023 | | December 31, 2022 | | September 30, 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 | | $ | 64,661 | | $ | 8,075 | | $ | 65,315 | | $ | 8,240 | | $ | 64,241 | | $ | 9,962 | | $ | 65,315 | | $ | 8,240 |
Liabilities | |
| 64,661 | |
| (8,075) | |
| 65,315 | |
| (8,240) | |
| 64,241 | |
| (9,962) | |
| 65,315 | |
| (8,240) |
Total | | $ | 129,322 | | $ | — | | $ | 130,630 | | $ | — | | $ | 128,482 | | $ | — | | $ | 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 $7.8$8.6 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 JuneSeptember 30, 2023 and December 31, 2022:
| | | | | | | | | | | | | | |
(dollars in thousands) |
| June 30, 2023 |
| December 31, 2022 | |
| September 30, 2023 |
| December 31, 2022 | | ||||
Notional Amount | | $ | 183,000 | | $ | 163,000 | | | $ | 183,000 | | $ | 163,000 | |
Weighted Average Pay Rate | | | 2.00 | % | | 1.90 | % | | | 2.00 | % | | 1.90 | % |
Weighted Average Receive Rate | | | 5.04 | % | | 3.47 | % | | | 5.40 | % | | 3.47 | % |
Weighted Average Maturity (Years) | | | 4.55 | | | 5.15 | | | | 4.30 | | | 5.15 | |
Net Unrealized Gain | | $ | 8,749 | | $ | 9,175 | | | $ | 11,139 | | $ | 9,175 | |
25
The Company purchases interest rate caps, designated as cash flow hedges, of certain deposit liabilities. The interest rate caps require receipt of variable amounts from the counterparties when interest rates rise above the strike price in the contracts. For the three and sixnine months ended JuneSeptember 30, 2023, the company recognized amortization expense on the interest rate caps of $198,000 and $395,000,$593,000, respectively, which was recorded as a component of interest expense on brokered deposits and FHLB advances. For the three and sixnine months ended JuneSeptember 30, 2022, the company recognized amortization expense on the interest rate caps of $193,000$204,000 and $370,000,$574,000, 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 JuneSeptember 30, 2023 and December 31, 2022:
| | | | | | | | | | | | | | |
(dollars in thousands) |
| June 30, 2023 |
| December 31, 2022 | |
| September 30, 2023 |
| December 31, 2022 | | ||||
Notional Amount | | $ | 125,000 | | $ | 125,000 | | | $ | 125,000 | | $ | 125,000 | |
Unamortized Premium Paid | | | 5,476 | | | 5,872 | | | | 5,279 | | | 5,872 | |
Weighted Average Strike Rate | | | 0.96 | % | | 0.96 | % | | | 0.96 | % | | 0.96 | % |
Weighted Average Maturity (Years) | | | 6.85 | | | 7.35 | | | | 6.60 | | | 7.35 | |
The following table presents a summary of the Company’s interest rate contracts as of JuneSeptember 30, 2023 and December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2023 | | December 31, 2022 | | September 30, 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 | | $ | 10,055 | | $ | 125,000 | | $ | 10,477 | | $ | 183,000 | | $ | 11,139 | | $ | 125,000 | | $ | 10,477 |
Liabilities | | | 58,000 | | | (1,306) | | | 38,000 | | | (1,302) | | | — | | | — | | | 38,000 | | | (1,302) |
Interest rate cap agreements: | | | | | | | | | | | | | | | | | | | | | | | | |
Assets | | | 125,000 | | | 19,455 | | | 125,000 | | | 19,406 | | | 125,000 | | | 23,006 | | | 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 JuneSeptember 30, 2023 and December 31, 2022, the Company pledged no cash collateral for the Company’s derivative contracts. In addition, as of JuneSeptember 30, 2023 and December 31, 2022, the Company's counterparties pledged cash collateral to the Company of $37.2$46.0 million and $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 JuneSeptember 30, 2023 and December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Gross Amounts Not Offset in the Balance Sheet | | | | | | | | | | | | | | Gross Amounts Not Offset in the Balance Sheet | | | | ||||||||
| | | | | | | | Net Amounts of | | | | | | | | | | | | | Net Amounts of | | | | | | ||||||||||
| | Gross Amounts | | Gross Amounts | | Assets (Liabilities) | | | | | | | Gross Amounts | | Gross Amounts | | Assets (Liabilities) | | | | | | ||||||||||||||
| | of Recognized | | Offset in the | | Presented in the | | Financial | | Cash Collateral | | Net Assets | | 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) | | Assets (Liabilities) | | Balance Sheet | | Balance Sheet | | Instruments | | Received (Paid) | | (Liabilities) | ||||||||||||
June 30, 2023 | | | | | | | | | | | | | | | | | | | ||||||||||||||||||
September 30, 2023 | | | | | | | | | | | | | | | | | | | ||||||||||||||||||
Assets | | $ | 37,585 | | $ | — | | $ | 37,585 | | $ | — | | $ | 37,193 | | $ | 392 | | $ | 44,107 | | $ | — | | $ | 44,107 | | $ | — | | $ | 46,023 | | $ | (1,916) |
Liabilities | |
| (9,381) | |
| — | |
| (9,381) | |
| — | |
| — | |
| (9,381) | |
| (9,962) | |
| — | |
| (9,962) | |
| — | |
| — | |
| (9,962) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2022 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Assets | | $ | 38,123 | | $ | — | | $ | 38,123 | | $ | — | | $ | 36,353 | | $ | 1,770 | | $ | 38,123 | | $ | — | | $ | 38,123 | | $ | — | | $ | 36,353 | | $ | 1,770 |
Liabilities | | | (9,542) | | | — | | | (9,542) | | | — | | | — | | | (9,542) | | | (9,542) | | | — | | | (9,542) | | | — | | | — | | | (9,542) |
26
The following table presents the effect of derivative instruments in cash flow hedging relationships on the consolidated statements of income for the three and sixnine months ended JuneSeptember 30, 2023 and 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | ||||
| | | | Three Months Ended June 30, | | Six Months Ended June 30, | | | | Three Months Ended September 30, | | Nine Months Ended September 30, | ||||||||||||||||
(dollars in thousands) | (dollars in thousands) | | 2023 | | 2022 | | 2023 | | 2022 | (dollars in thousands) | | 2023 | | 2022 | | 2023 | | 2022 | ||||||||||
Derivatives in | | Location of Gain (Loss) | | Gain (Loss) | | Loss | | Location of Gain (Loss) | | Gain (Loss) | | Loss | ||||||||||||||||
Cash Flow Hedging | | Reclassified | | Reclassified from | | Reclassified from | | Reclassified | | Reclassified from | | Reclassified from | ||||||||||||||||
Relationships | | from AOCI into Income | | AOCI into Earnings | | AOCI into Earnings | | from AOCI into Income | | AOCI into Earnings | | AOCI into Earnings | ||||||||||||||||
Interest rate swaps | | Interest expense | | $ | 1,418 | | $ | (65) | | $ | 2,594 | | $ | (312) | | Interest expense | | $ | 1,575 | | $ | 288 | | $ | 4,169 | | $ | (24) |
Interest rate caps | | Interest expense | | | (97) | | (194) | | | (207) | | (370) | | Interest expense | | | 48 | | (169) | | | (159) | | (539) |
No amounts were reclassified from accumulated other comprehensive income into net income related to hedge ineffectiveness for these derivatives during the three and sixnine months ended JuneSeptember 30, 2023 and 2022, 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 aggregate principal balances of $1.331.37 billion and $1.20 billion at JuneSeptember 30, 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 $400.8$516.5 million and $390.9 million at JuneSeptember 30, 2023 and December 31, 2022, respectively.
The following table presents FHLB advances, by maturity, at JuneSeptember 30, 2023 and December 31, 2022:
| | | | | | | | | | | | | | | | | | | | |
| | June 30, 2023 | | December 31, 2022 | | September 30, 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 | | 4.99 | % | $ | 115,500 | | 4.30 | % | $ | 83,000 | | 5.26 | % | $ | 208,000 | | 4.30 | % | $ | 83,000 |
1 to 2 Years | | 4.40 | | | 47,500 | | 1.05 | | | 5,000 | | 4.31 | | | 25,000 | | 1.05 | | | 5,000 |
2 to 3 Years | | 4.21 | | | 40,000 | | 1.22 | | | 5,000 | | 4.06 | | | 17,500 | | 1.22 | | | 5,000 |
3 to 4 Years | | 3.65 | | | 31,500 | | 0.78 | | | 4,000 | | 3.35 | | | 21,500 | | 0.78 | | | 4,000 |
4 to 5 Years | | 4.01 | | | 27,500 | | — | | | — | | 4.01 | | | 22,500 | | — | | | — |
Totals | | | | $ | 262,000 | | | | $ | 97,000 | | | | $ | 294,500 | | | | $ | 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 June 30, 2023 and December 31, 2022, theThe Company believes it was in compliance with all covenants.covenants as of September 30, 2023 and December 31, 2022.
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 JuneSeptember 30, 2023 and December 31, 2022, there was an outstanding balance of $13.8 million under the revolving line of credit.
27
Note 8: Subordinated Debentures
The following table presents a summary of the Company’s subordinated debentures as of JuneSeptember 30, 2023:2023 and December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | 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 | | June 30, 2023 | | | December 31, 2022 | | Rate | | Coupon Structure | | Established | | Redemption Date | | Date | | September 30, 2023 | | | December 31, 2022 | | Rate | | | Coupon Structure | |
(dollars in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
2030 Notes | | June 19, 2020 | | July 1, 2025 | | July 1, 2030 | $ | 50,000 | | $ | 50,000 | | 5.25 | % | | Fixed-to-Floating (1) | | 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 (2) | | July 8, 2021 | | July 15, 2026 | | July 15, 2031 | | 30,000 | | | 30,000 | | 3.25 | % | | Fixed-to-Floating (2) |
Subordinated Debentures | | | | | | | | 80,000 | | | 80,000 | | | | | | | | | | | | 80,000 | | | 80,000 | | | | | | |
Debt Issuance Costs | | | | | | | | (904) | | | (1,095) | | | | | | | | | | | | (808) | | | (1,095) | | | | | | |
Subordinated Debentures, Net of Issuance Costs | | | | | | | $ | 79,096 | | $ | 78,905 | | | | | | | | | | | $ | 79,192 | | $ | 78,905 | | | | | |
(1) | Migrates to three month term SOFR + 5.13% beginning July 1, 2025 until either the early redemption date or the maturity date. |
(2) | Migrates to three month term SOFR + 2.52% beginning July 15, 2026 until either the early redemption date or the maturity date. |
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 table presents commitments outstanding at JuneSeptember 30, 2023 and December 31, 2022:
| | | | | | | | | | | | |
| | June 30, | | December 31, | | September 30, | | December 31, | ||||
(dollars in thousands) |
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||
Unfunded Commitments Under Lines of Credit | | $ | 644,077 | | $ | 848,734 | | $ | 570,363 | | $ | 848,734 |
Letters of Credit | |
| 126,012 | |
| 115,769 | |
| 107,292 | |
| 115,769 |
Totals | | $ | 770,089 | | $ | 964,503 | | $ | 677,655 | | $ | 964,503 |
The Company had outstanding letters of credit with the FHLB in total amounts of $68.2$66.8 million and $78.4 million at JuneSeptember 30, 2023 and December 31, 2022, respectively, on behalf of customers and to secure public deposits.
28
The ACL for off-balance sheet credit exposures was $3.8$3.2 million at JuneSeptember 30, 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 and sixnine months ended JuneSeptember 30, 2023:
| | | | | | | | | | | ||
| | | Three Months Ended | | Six Months Ended | | | Three Months Ended | | Nine Months Ended | ||
(dollars in thousands) | | | June 30, 2023 | | June 30, 2023 | | | September 30, 2023 | | September 30, 2023 | ||
Allowance for Credit Losses: | | | | | | | | | | | ||
Beginning Balance, Prior to Adoption of CECL | | $ | 4,335 | | $ | 360 | | $ | 3,835 | | $ | 360 |
Impact of Adopting CECL | | | — | | 4,850 | | | — | | 4,850 | ||
Provision (Credit) for Off-Balance Sheet Credit Exposures | | | (500) | | | (1,375) | ||||||
Provision for (Recovery of) Off-Balance Sheet Credit Exposures | | | (600) | | | (1,975) | ||||||
Total Ending Balance | | $ | 3,835 | | $ | 3,835 | | $ | 3,235 | | $ | 3,235 |
28
Legal Contingencies
Neither the Company nor any of its subsidiaries is a party, and no property of these entities is subject, to any material pending legal proceedings, other than ordinary routine litigation incidental to the Bank’s business. The Company does not know of any material proceeding contemplated by a governmental authority against the Company or any of its subsidiaries.
Note 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 granted under the 2012 Plan. The exercise price of each option equals the fair market value of the Company’s stock on the date of grant, and the maximum term of each outstanding option is ten years. All outstanding options have been granted with vesting periods of four or five years. The 2012 Plan expired in March 2022, and awards are no longer able to be granted under the 2012 Plan.
In 2017, the Company adopted the Bridgewater Bancshares, Inc. 2017 Combined Incentive and Non-Statutory Stock Option Plan (the “2017 Plan”). Under the 2017 Plan, the Company may grant options to its directors, officers, employees and consultants for up to 1,500,000 shares of common stock. Both incentive stock options and nonqualified stock options may be granted under the 2017 Plan. The exercise price of each option equals the fair market value of the Company’s stock on the date of grant and the maximum term of each outstanding option is ten years. All outstanding options have been granted with vesting periods of four or five years. As of JuneSeptember 30, 2023 and December 31, 2022, there were 48,700-0- and 44,700 shares, respectively, of the Company’s common stock reserved for future option grants under the 2017 Plan.
In 2019, the Company adopted the Bridgewater Bancshares, Inc. 2019 Equity Incentive Plan (the “2019 EIP”). 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 JuneSeptember 30, 2023 and December 31, 2022, there were 128,271-0- and 231,363 shares, respectively, of the Company’s common stock reserved for future grants under the 2019 EIP.
At the 2023 Annual Meeting of Shareholders (the "Annual Meeting") of the Company, which was held on April 25, 2023, the Company's shareholders approved the Bridgewater Bancshares, Inc. 2023 Equity Incentive Plan (the "2023 EIP"), which the Company's board of directors adopted on February 28, 2023, subject to shareholder approval at the Annual Meeting. Under the 2023 EIP, the Company may grant incentive and nonqualified stock options, stock appreciation rights, stock awards, restricted stock units, restricted stock and cash incentive awards. The Company may
29
grant these awards to its directors, officers, employees and certain other service providers for up to 1,500,000 shares of common stock. The Company has not yet made anyexercise 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, 2023, there were 1,438,137 shares of the Company’s common stock reserved for future grants under the 2023 EIP.
Stock Options
The fair value of each option award is estimated on the date of grant using a closed form option valuation (Black-Scholes) model. 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, 2023, are as follows:
| | | |
| | September 30, | |
| 2023 | ||
Dividend Yield | — | % | |
Expected Life | 7 | Years | |
Expected Volatility | 42.25 | % | |
Risk-Free Interest Rate | 4.15 | % |
The following table presents a summary of the status of the Company’s outstanding stock options for the sixnine months ended JuneSeptember 30, 2023:
| | | | | |
| | September 30, 2023 | |||
|
|
|
| Weighted | |
| | | | Average | |
| | Shares | | Exercise Price | |
Outstanding at Beginning of Year |
| 1,913,444 | | $ | 9.35 |
Granted |
| 239,000 | |
| 10.65 |
Exercised |
| (226,000) | |
| 3.17 |
Forfeitures |
| (9,000) | |
| 13.04 |
Outstanding at Period End |
| 1,917,444 | | $ | 10.22 |
| | | | | |
Options Exercisable at Period End |
| 1,378,194 | | $ | 8.88 |
For the three months ended September 30, 2023 and 2022, the Company recognized compensation expense for stock options of $230,000 and $326,000, respectively. For the nine months ended September 30, 2023 and 2022, the Company recognized compensation expense for stock options of $601,000 and $926,000, respectively.
2930
| | | | | |
| | June 30, 2023 | |||
|
|
|
| Weighted | |
| | | | Average | |
| | Shares | | Exercise Price | |
Outstanding at Beginning of Year |
| 1,913,444 | | $ | 9.35 |
Granted |
| — | |
| — |
Exercised |
| (199,000) | |
| 3.15 |
Forfeitures |
| (4,000) | |
| 7.47 |
Outstanding at Period End |
| 1,710,444 | | $ | 10.08 |
| | | | | |
Options Exercisable at Period End |
| 1,386,194 | | $ | 8.73 |
For the three months ended June 30, 2023 and 2022, the Company recognized compensation expense for stock options of $185,000 and $312,000, respectively. For the six months ended June 30, 2023 and 2022, the Company recognized compensation expense for stock options of $371,000 and $600,000, respectively.
The following table presents information pertaining to options outstanding at JuneSeptember 30, 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 | ||||
$ | 3.00 - 3.99 |
| 113,500 | | $ | 3.05 | | 0.6 |
| 113,500 |
| $ | 3.05 | 3.00 - 3.99 |
| 88,500 | | $ | 3.07 | | 0.4 |
| 88,500 |
| $ | 3.07 |
| 7.00 - 7.99 |
| 895,416 |
| | 7.47 |
| 4.3 |
| 895,416 |
| | 7.47 | 7.00 - 7.99 |
| 893,416 |
| | 7.47 |
| 4.0 |
| 893,416 |
| | 7.47 |
| 8.00 - 8.99 |
| 17,500 |
| | 8.76 |
| 6.8 |
| 11,250 |
| | 8.76 | 8.00 - 8.99 |
| 17,500 |
| | 8.76 |
| 6.5 |
| 11,250 |
| | 8.76 |
| 10.00 - 10.99 | | 10,000 | | | 10.08 | | 6.9 | | 7,500 | | | 10.08 | 10.00 - 10.99 | | 249,000 | | | 10.63 | | 9.7 | | 7,500 | | | 10.08 |
| 11.00 - 11.99 | | 85,000 | | | 11.27 | | 5.9 | | 58,000 | | | 11.29 | 11.00 - 11.99 | | 85,000 | | | 11.27 | | 5.6 | | 68,000 | | | 11.27 |
| 12.00 - 12.99 | | 263,528 | | | 12.90 | | 6.1 | | 197,778 | | | 12.90 | 12.00 - 12.99 | | 263,528 | | | 12.90 | | 5.9 | | 206,778 | | | 12.90 |
| 13.00 - 13.99 | | 25,000 | | | 13.22 | | 4.9 | | 25,000 | | | 13.22 | 13.00 - 13.99 | | 25,000 | | | 13.22 | | 4.6 | | 25,000 | | | 13.22 |
| 17.00 - 17.99 | | 300,500 | | | 17.50 | | 8.6 | | 77,750 | | | 17.50 | 17.00 - 17.99 | | 295,500 | | | 17.50 | | 8.3 | | 77,750 | | | 17.50 |
| Totals |
| 1,710,444 | | $ | 10.08 | | 5.2 |
| 1,386,194 | | $ | 8.73 | Totals |
| 1,917,444 | | $ | 10.22 | | 5.6 |
| 1,378,194 | | $ | 8.88 |
As of JuneSeptember 30, 2023, there was $1.2$2.2 million of total unrecognized compensation cost related to nonvested stock options granted under the 2012 Plan, 2017 Plan, 2019 EIP, and 20192023 EIP that is expected to be recognized over a weighted-average period of 2.32.7 years.
The following table presents an analysis of nonvested options to purchase shares of the Company’s stock issued and outstanding for the sixnine months ended JuneSeptember 30, 2023:
| | | | | | | | | | |
|
|
|
| Weighted |
|
|
| Weighted | ||
| | Number of | | Average Grant | | Number of | | Average Grant | ||
| | Shares | | Date Fair Value | | Shares | | Date Fair Value | ||
Nonvested Options at December 31, 2022 |
| 421,375 | | $ | 4.87 |
| 421,375 | | $ | 4.87 |
Granted |
| — | | | — |
| 239,000 | | | 5.39 |
Vested |
| (97,125) | | | 5.05 |
| (116,125) | | | 4.78 |
Forfeited | | — | | | — | | (5,000) | | | 5.74 |
Nonvested Options at June 30, 2023 |
| 324,250 | | $ | 4.82 | |||||
Nonvested Options at September 30, 2023 |
| 539,250 | | $ | 5.11 |
30
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 sixnine months ended JuneSeptember 30, 2023:
| | | | | | | | | | |
|
|
|
| Weighted |
|
|
| Weighted | ||
| | Number of | | Average Grant | | Number of | | Average Grant | ||
| | Shares | | Date Fair Value | | Shares | | Date Fair Value | ||
Nonvested Awards at December 31, 2022 |
| 38,762 | | $ | 12.50 |
| 38,762 | | $ | 12.50 |
Granted |
| — | | | — |
| — | | | — |
Vested |
| (2,785) | | | 10.32 |
| (2,785) | | | 10.32 |
Forfeited | | (250) | | | 12.92 | | (250) | | | 12.92 |
Nonvested Awards at June 30, 2023 |
| 35,727 | | $ | 12.67 | |||||
Nonvested Awards at September 30, 2023 |
| 35,727 | | $ | 12.67 |
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 JuneSeptember 30, 2023 and 2022, the Company recognized compensation expense for restricted stock
31
awards of $112,000 and $113,000, respectively. For the nine months ended September 30, 2023 and 2022, the Company recognized compensation expense for restricted stock awards of $110,000$333,000 and $111,000, respectively. For the six months ended June 30, 2023 and 2022, the Company recognized compensation expense for restricted stock awards of $221,000 and $222,000,$335,000, respectively.
As of JuneSeptember 30, 2023, there was $209,000$97,000 of total unrecognized compensation cost related to nonvested restricted stock awards granted under the 2019 EIP that is expected to be recognized over a weighted-average period of 0.50.2 years.
In addition, during the sixnine months ended JuneSeptember 30, 2023, the Company issued 22,87235,460 shares of unrestricted common stock to non-employee directors, as a part of their compensation for their annual services on the Company’s board of directors. The aggregate value of the shares issued to non-employee directors of $236,000$355,000 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 sixnine months ended JuneSeptember 30, 2023:
| | | | | | | | | | |
|
|
|
| Weighted |
|
|
| Weighted | ||
| | Number of | | Average Grant | | Number of | | Average Grant | ||
| | Units | | Date Fair Value | | Units | | Date Fair Value | ||
Nonvested Units at December 31, 2022 |
| 351,310 | | $ | 16.30 |
| 351,310 | | $ | 16.30 |
Granted |
| 82,969 | | | 15.59 |
| 82,969 | | | 15.59 |
Vested |
| (2,225) | | | 16.23 |
| (5,225) | | | 16.20 |
Forfeited | | (2,499) | | | 16.54 | | (10,253) | | | 17.79 |
Nonvested Units at June 30, 2023 |
| 429,555 | | $ | 16.16 | |||||
Nonvested Units at September 30, 2023 |
| 418,801 | | $ | 16.13 |
31
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 JuneSeptember 30, 2023 and 2022, the Company recognized compensation expense for restricted stock units of $556,000$535,000 and $345,000,$358,000, respectively. For the sixnine months ended JuneSeptember 30, 2023 and 2022, the Company recognized compensation expense for the restricted stock of $1.1$1.6 million and $699,000,$1.1 million, respectively.
As of JuneSeptember 30, 2023, there was $5.7$5.0 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 2.82.4 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.
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 June 30, 2023 and December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Minimum Required | | For Capital Adequacy | | To be Well Capitalized | | |||||||||
| | | | | | | For Capital Adequacy | | Purposes Plus Capital | | Under Prompt Corrective | | |||||||||
| | Actual | | Purposes | | Conservation Buffer | | Action Regulations | | ||||||||||||
(dollars in thousands) |
| Amount |
| Ratio |
| Amount |
| Ratio |
| Amount |
| Ratio | | Amount |
| Ratio | | ||||
June 30, 2023 | | | | | | | | | | | | | | | | | | | | | |
Company (Consolidated): | | | | | | | | | | | | | | | | | | | | | |
Total Risk-based Capital | | $ | 558,011 | | 13.50 | % | $ | 330,738 | | 8.00 | % | $ | 434,093 | | 10.50 | % | | N/A | | N/A | |
Tier 1 Risk-based Capital | | | 427,202 | | 10.33 | | | 248,053 | | 6.00 | | | 351,409 | | 8.50 | | | N/A | | N/A | |
Common Equity Tier 1 Capital | | | 360,688 | | 8.72 | | | 186,040 | | 4.50 | | | 289,395 | | 7.00 | | | N/A | | N/A | |
Tier 1 Leverage Ratio | | | 427,202 | | 9.47 | | | 180,506 | | 4.00 | | | 180,506 | | 4.00 | | | N/A | | N/A | |
Bank: | | | | | | | | | | | | | | | | | | | | | |
Total Risk-based Capital | | $ | 533,123 | | 12.91 | % | $ | 330,417 | | 8.00 | % | $ | 433,673 | | 10.50 | % | $ | 413,022 | | 10.00 | % |
Tier 1 Risk-based Capital | | | 481,459 | | 11.66 | | | 247,813 | | 6.00 | | | 351,069 | | 8.50 | | | 330,417 | | 8.00 | |
Common Equity Tier 1 Capital | | | 481,459 | | 11.66 | | | 185,860 | | 4.50 | | | 289,115 | | 7.00 | | | 268,464 | | 6.50 | |
Tier 1 Leverage Ratio | | | 481,459 | | 10.69 | | | 180,227 | | 4.00 | | | 180,227 | | 4.00 | | | 225,284 | | 5.00 | |
32
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, 2023 and December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Minimum Required | | For Capital Adequacy | | To be Well Capitalized | | |||||||||
| | | | | | | For Capital Adequacy | | Purposes Plus Capital | | Under Prompt Corrective | | |||||||||
| | Actual | | Purposes | | Conservation Buffer | | Action Regulations | | ||||||||||||
(dollars in thousands) |
| Amount |
| Ratio |
| Amount |
| Ratio |
| Amount |
| Ratio | | Amount |
| Ratio | | ||||
September 30, 2023 | | | | | | | | | | | | | | | | | | | | | |
Company (Consolidated): | | | | | | | | | | | | | | | | | | | | | |
Total Risk-based Capital | | $ | 567,202 | | 13.88 | % | $ | 326,865 | | 8.00 | % | $ | 429,010 | | 10.50 | % | | N/A | | N/A | |
Tier 1 Risk-based Capital | | | 436,903 | | 10.69 | | | 245,149 | | 6.00 | | | 347,294 | | 8.50 | | | N/A | | N/A | |
Common Equity Tier 1 Capital | | | 370,389 | | 9.07 | | | 183,861 | | 4.50 | | | 286,007 | | 7.00 | | | N/A | | N/A | |
Tier 1 Leverage Ratio | | | 436,903 | | 9.62 | | | 181,605 | | 4.00 | | | 181,605 | | 4.00 | | | N/A | | N/A | |
Bank: | | | | | | | | | | | | | | | | | | | | | |
Total Risk-based Capital | | $ | 543,914 | | 13.33 | % | $ | 326,519 | | 8.00 | % | $ | 428,556 | | 10.50 | % | $ | 408,149 | | 10.00 | % |
Tier 1 Risk-based Capital | | | 492,861 | | 12.08 | | | 244,889 | | 6.00 | | | 346,926 | | 8.50 | | | 326,519 | | 8.00 | |
Common Equity Tier 1 Capital | | | 492,861 | | 12.08 | | | 183,667 | | 4.50 | | | 285,704 | | 7.00 | | | 265,297 | | 6.50 | |
Tier 1 Leverage Ratio | | | 492,861 | | 10.88 | | | 181,256 | | 4.00 | | | 181,256 | | 4.00 | | | 226,570 | | 5.00 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Minimum Required | | For Capital Adequacy | | To be Well Capitalized | | |||||||||
| | | | | | | For Capital Adequacy | | Purposes Plus Capital | | Under Prompt Corrective | | |||||||||
| | Actual | | Purposes | | Conservation Buffer | | Action Regulations | | ||||||||||||
(dollars in thousands) |
| Amount |
| Ratio |
| Amount |
| Ratio |
| Amount |
| Ratio | | Amount |
| Ratio | | ||||
December 31, 2022 | | | | | | | | | | | | | | | | | | | | | |
Company (Consolidated): | | | | | | | | | | | | | | | | | | | | | |
Total Risk-based Capital | | $ | 536,352 | | 13.15 | % | $ | 326,190 | | 8.00 | % | $ | 428,125 | | 10.50 | % | | N/A | | N/A | |
Tier 1 Risk-based Capital | | | 409,092 | | 10.03 | | | 244,643 | | 6.00 | | | 346,577 | | 8.50 | | | N/A | | N/A | |
Common Equity Tier 1 Capital | | | 342,578 | | 8.40 | | | 183,482 | | 4.50 | | | 285,417 | | 7.00 | | | N/A | | N/A | |
Tier 1 Leverage Ratio | | | 409,092 | | 9.55 | | | 171,368 | | 4.00 | | | 171,368 | | 4.00 | | | N/A | | N/A | |
Bank: | | | | | | | | | | | | | | | | | | | | | |
Total Risk-based Capital | | $ | 508,760 | | 12.47 | % | $ | 326,288 | | 8.00 | % | $ | 428,253 | | 10.50 | % | $ | 407,860 | | 10.00 | % |
Tier 1 Risk-based Capital | | | 460,404 | | 11.29 | | | 244,716 | | 6.00 | | | 346,681 | | 8.50 | | | 326,288 | | 8.00 | |
Common Equity Tier 1 Capital | | | 460,404 | | 11.29 | | | 183,537 | | 4.50 | | | 285,502 | | 7.00 | | | 265,109 | | 6.50 | |
Tier 1 Leverage Ratio | | | 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.
33
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.
33
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 assets and liabilities measured at fair value on a recurring basis as of JuneSeptember 30, 2023 and December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2023 | | September 30, 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 | | $ | 2,249 | | $ | — | | $ | — | | $ | 2,249 | | $ | 2,864 | | $ | — | | $ | — | | $ | 2,864 |
Municipal Bonds | | | — | | | 127,361 | | | — | | | 127,361 | | | — | | | 122,497 | | | — | | | 122,497 |
Mortgage-Backed Securities | | | — | | | 220,926 | | | — | | | 220,926 | | | — | | | 210,375 | | | — | | | 210,375 |
Corporate Securities | | | — | | | 113,346 | | | — | | | 113,346 | | | — | | | 121,717 | | | — | | | 121,717 |
SBA Securities | | | — | | | 21,686 | | | — | | | 21,686 | | | — | | | 19,966 | | | — | | | 19,966 |
Asset-Backed Securities | | | — | | | 52,652 | | | — | | | 52,652 | | | — | | | 75,657 | | | — | | | 75,657 |
Interest Rate Caps | | | — | | | 19,455 | | | — | | | 19,455 | | | — | | | 23,006 | | | — | | | 23,006 |
Interest Rate Swaps | | | — | | | 18,130 | | | — | | | 18,130 | | | — | | | 21,101 | | | — | | | 21,101 |
Total Fair Value of Financial Assets | | $ | 2,249 | | $ | 573,556 | | $ | — | | $ | 575,805 | | $ | 2,864 | | $ | 594,319 | | $ | — | | $ | 597,183 |
Fair Value of Financial Liabilities: | | | | | | | | | | | | | | | | | | | | | | | | |
Interest Rate Swaps | | $ | — | | $ | 9,381 | | $ | — | | $ | 9,381 | | $ | — | | $ | 9,962 | | $ | — | | $ | 9,962 |
Total Fair Value of Financial Liabilities | | $ | — | | $ | 9,381 | | $ | — | | $ | 9,381 | | $ | — | | $ | 9,962 | | $ | — | | $ | 9,962 |
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| | | | | | | | | | | | |
| | December 31, 2022 | ||||||||||
(dollars in thousands) |
| Level 1 |
| Level 2 |
| Level 3 |
| Total | ||||
Fair Value of Financial Assets: | | | | | | | | | | | | |
Securities Available for Sale: | | | | | | | | | | | | |
U.S. Treasury Securities | | $ | 2,580 | | $ | — | | $ | — | | $ | 2,580 |
Municipal Bonds | | | — | | | 131,354 | | | — | | | 131,354 |
Mortgage-Backed Securities | | | — | | | 237,784 | | | — | | | 237,784 |
Corporate Securities | | | — | | | 109,827 | | | — | | | 109,827 |
SBA Securities | | | — | | | 20,877 | | | — | | | 20,877 |
Asset-Backed Securities | | | — | | | 46,191 | | | — | | | 46,191 |
Interest Rate Caps | | | — | | | 19,406 | | | — | | | 19,406 |
Interest Rate Swaps | | | — | | | 18,717 | | | — | | | 18,717 |
Total Fair Value of Financial Assets | | $ | 2,580 | | $ | 584,156 | | $ | — | | $ | 586,736 |
Fair Value of Financial Liabilities: | | | | | | | | | | | | |
Interest Rate Swaps | | $ | — | | $ | 9,542 | | $ | — | | $ | 9,542 |
Total Fair Value of Financial Liabilities | | $ | — | | $ | 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
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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 JuneSeptember 30, 2023 and December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2023 | | September 30, 2023 | ||||||||||||||||||||
(dollars in thousands) |
| Level 1 |
| Level 2 |
| Level 3 |
| Loss |
| Level 1 |
| Level 2 |
| Level 3 |
| Loss | ||||||||
Individually Evaluated Loans | | $ | — | | $ | 80 | | $ | — | | $ | 75 | | $ | — | | $ | 175 | | $ | — | | $ | 179 |
Totals | | $ | — | | $ | 80 | | $ | — | | $ | 75 | | $ | — | | $ | 175 | | $ | — | | $ | 179 |
| | | | | | | | | | | | |
| | December 31, 2022 | ||||||||||
(dollars in thousands) |
| Level 1 |
| Level 2 |
| Level 3 |
| Loss | ||||
Impaired Loans | | $ | — | | $ | 96 | | $ | — | | $ | 71 |
Totals | | $ | — | | $ | 96 | | $ | — | | $ | 71 |
Individually Evaluated Loans (Impaired Loans prior to January 1, 2023)
In accordance with the provisions of the individually evaluated loan guidance, 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 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. Those 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. 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.
Credit loss amounts on individually evaluated loans represent specific valuation allowance and write-downs during the period presented 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.
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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.
The following tables present the carrying amounts and estimated fair values of financial instruments at June 30, 2023 and December 31, 2022:
| | | | | | | | | | | | | | | |
| | June 30, 2023 | |||||||||||||
| | | | | Fair Value Hierarchy | | | | |||||||
| | Carrying | | | | | | | | | | | Estimated | ||
(dollars in thousands) |
| Amount |
| Level 1 |
| Level 2 |
| Level 3 |
| Fair Value | |||||
Financial Assets: | | | | | | | | | | | | | | | |
Cash and Due From Banks | | $ | 177,101 | | $ | 177,101 | | $ | — | | $ | — | | $ | 177,101 |
Bank-Owned Certificates of Deposit | | | 1,225 | | | — | | | 1,213 | | | — | | | 1,213 |
Securities Available for Sale | | | 538,220 | | | 2,249 | | | 535,971 | | | — | | | 538,220 |
FHLB Stock, at Cost | | | 21,557 | | | — | | | 21,557 | | | — | | | 21,557 |
Loans, Net | | | 3,677,792 | | | — | | | 3,505,922 | | | — | | | 3,505,922 |
Accrued Interest Receivable | | | 13,822 | | | — | | | 13,822 | | | — | | | 13,822 |
Interest Rate Caps | | | 19,455 | | | — | | | 19,455 | | | — | | | 19,455 |
Interest Rate Swaps | | | 18,130 | | | — | | | 18,130 | | | — | | | 18,130 |
| | | | | | | | | | | | | | | |
Financial Liabilities: | | | | | | | | | | | | | | | |
Deposits | | $ | 3,577,932 | | $ | — | | $ | 3,554,346 | | $ | — | | $ | 3,554,346 |
Federal Funds Purchased | | | 195,000 | | | — | | | 195,000 | | | — | | | 195,000 |
Notes Payable | | | 13,750 | | | — | | | 13,767 | | | — | | | 13,767 |
FHLB Advances | | | 262,000 | | | — | | | 261,252 | | | — | | | 261,252 |
Subordinated Debentures | | | 79,096 | | | — | | | 71,124 | | | — | | | 71,124 |
Accrued Interest Payable | | | 2,974 | | | — | | | 2,974 | | | — | | | 2,974 |
Interest Rate Swaps | | | 9,381 | | | — | | | 9,381 | | | — | | | 9,381 |
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realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.
The following tables present the carrying amounts and estimated fair values of financial instruments at September 30, 2023 and December 31, 2022:
| | | | | | | | | | | | | | | |
| | September 30, 2023 | |||||||||||||
| | | | | Fair Value Hierarchy | | | | |||||||
| | Carrying | | | | | | | | | | | Estimated | ||
(dollars in thousands) |
| Amount |
| Level 1 |
| Level 2 |
| Level 3 |
| Fair Value | |||||
Financial Assets: | | | | | | | | | | | | | | | |
Cash and Due From Banks | | $ | 124,358 | | $ | 124,358 | | $ | — | | $ | — | | $ | 124,358 |
Bank-Owned Certificates of Deposit | | | 1,225 | | | — | | | 1,210 | | | — | | | 1,210 |
Securities Available for Sale | | | 553,076 | | | 2,864 | | | 550,212 | | | — | | | 553,076 |
FHLB Stock, at Cost | | | 17,056 | | | — | | | 17,056 | | | — | | | 17,056 |
Loans, Net | | | 3,664,464 | | | — | | | 3,522,379 | | | — | | | 3,522,379 |
Accrued Interest Receivable | | | 15,182 | | | — | | | 15,182 | | | — | | | 15,182 |
Interest Rate Caps | | | 23,006 | | | — | | | 23,006 | | | — | | | 23,006 |
Interest Rate Swaps | | | 21,101 | | | — | | | 21,101 | | | — | | | 21,101 |
| | | | | | | | | | | | | | | |
Financial Liabilities: | | | | | | | | | | | | | | | |
Deposits | | $ | 3,675,509 | | $ | — | | $ | 3,653,876 | | $ | — | | $ | 3,653,876 |
Notes Payable | | | 13,750 | | | — | | | 13,771 | | | — | | | 13,771 |
FHLB Advances | | | 294,500 | | | — | | | 292,436 | | | — | | | 292,436 |
Subordinated Debentures | | | 79,192 | | | — | | | 71,794 | | | — | | | 71,794 |
Accrued Interest Payable | | | 3,816 | | | — | | | 3,816 | | | — | | | 3,816 |
Interest Rate Swaps | | | 9,962 | | | — | | | 9,962 | | | — | | | 9,962 |
| | | | | | | | | | | | | | | |
| | December 31, 2022 | |||||||||||||
| | | | | Fair Value Hierarchy | | | | |||||||
| | Carrying | | | | | | | | | | | Estimated | ||
(dollars in thousands) |
| Amount |
| Level 1 |
| Level 2 |
| Level 3 |
| Fair Value | |||||
Financial Assets: | | | | | | | | | | | | | | | |
Cash and Due From Banks | | $ | 87,043 | | $ | 87,043 | | $ | — | | $ | — | | $ | 87,043 |
Bank-Owned Certificates of Deposit | | | 1,181 | | | — | | | 1,173 | | | — | | | 1,173 |
Securities Available for Sale | | | 548,613 | | | 2,580 | | | 546,033 | | | — | | | 548,613 |
FHLB Stock, at Cost | | | 19,606 | | | — | | | 19,606 | | | — | | | 19,606 |
Loans, Net | | | 3,512,157 | | | — | | | 3,314,190 | | | — | | | 3,314,190 |
Accrued Interest Receivable | | | 13,479 | | | — | | | 13,479 | | | — | | | 13,479 |
Interest Rate Caps | | | 19,406 | | | — | | | 19,406 | | | — | | | 19,406 |
Interest Rate Swaps | | | 18,717 | | | — | | | 18,717 | | | — | | | 18,717 |
| | | | | | | | | | | | | | | |
Financial Liabilities: | | | | | | | | | | | | | | | |
Deposits | | $ | 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 | | | 97,000 | | | — | | | 96,061 | | | — | | | 96,061 |
Subordinated Debentures | | | 78,905 | | | — | | | 70,931 | | | — | | | 70,931 |
Accrued Interest Payable | | | 2,831 | | | — | | | 2,831 | | | — | | | 2,831 |
Interest Rate Swaps | | | 9,542 | | | — | | | 9,542 | | | — | | | 9,542 |
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.
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Bank-owned certificates of deposit – Fair values of bank-owned certificates of deposit are estimated using the discounted cash flow analysis based on current rates for similar types of deposits.
FHLB stock – The carrying amount of FHLB stock approximates its fair value.
Loans, net – Fair values for loans are estimated based on discounted cash flows, using interest rates currently being offered for loans with similar terms to borrowers with similar credit quality.
Accrued interest receivable – The carrying amount of accrued interest receivable approximates its fair value since it is short term in nature and does not present anticipated credit concerns.
Deposits – The fair values disclosed for demand deposits without stated maturities (interest and noninterest transaction, savings, and money market accounts) are equal to the amount payable on demand at the reporting date (their carrying amounts). Fair values for the fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.
Federal funds purchased – The carrying amount of federal funds purchased approximates the fair value.
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.
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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 JuneSeptember 30, 2023 and December 31, 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 July 26,October 25, 2023, the Company’s Board of Directors announced a quarterly cash dividend of $36.72 per share ($0.3672 per depositary share) on its 5.875% Non-Cumulative Perpetual Preferred Stock, Series A (“Series A Preferred Stock”), payable on SeptemberDecember 1, 2023, to shareholders of record on the Series A Preferred Stock at the close of business on AugustNovember 15, 2023.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
General
The following discussion explains the Company’s financial condition and results of operations as of and for the three and sixnine months ended JuneSeptember 30, 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, 2022, filed with the Securities and Exchange Commission, or the SEC, on March 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:
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● | interest rate risk, including the effects of recent and |
● | fluctuations in the values of the securities held in our securities portfolio, including as the result of changes in interest rates; |
● | business and economic conditions generally and in the financial services industry, nationally and within our market area, including rising rates of inflation and possible recession; |
● | loan concentrations in our loan portfolio; |
● | 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 credit losses; |
● | new or revised accounting standards, including as a result of the implementation of the new CECL standard; |
● | the concentration of large loans to certain borrowers; |
● | the concentration of large deposits from certain clients, who have balances above current Federal Deposit Insurance Corporation (“FDIC”) insurance limits; |
● | the ability to successfully manage liquidity 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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● | 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, including as a result of sophisticated attacks using artificial intelligence and similar tools; |
● | 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, in response to the recent failures of Silicon Valley Bank, Signature Bank and First Republic Bank; |
● | risks related to climate change and the negative impact it may have on our customers and their businesses; |
● | the imposition of |
● | severe weather, natural disasters, wide spread disease or pandemics (including the COVID-19 pandemic), acts of war or terrorism, or other adverse external events, including the Israeli-Palestinian conflict and 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 |
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● | 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. |
The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements included in this report. In addition, past results of operations are not necessarily indicative of future results. Any forward-looking statement made by us in this report is based only on information currently available to us and speaks only as of the date on which it is made. The Company undertakes no obligation to publicly update any forward-looking statement, whether written or oral, that may be made from time to time, whether as a result of new information, future developments or otherwise.
Overview
The Company is a financial holding company headquartered in St. Louis Park, Minnesota. The principal sources of funds for loans and investments are transaction, savings, time, and other deposits, and short-term and long-term borrowings. The Company’s principal sources of income are interest and fees collected on loans, interest and dividends earned on investment securities and service charges. The Company’s principal expenses are interest paid on deposit accounts and borrowings, employee compensation and other overhead expenses. The Company’s simple, efficient business model of providing responsive support and unconventional experiences to clients continues to be the underlying principle that drives the Company’s profitable growth.
Critical Accounting Policies and Estimates
The consolidated financial statements of the Company are prepared based on the application of certain accounting policies, the most significant of which are described in “Note 1 – Description of the Business and Summary
40
of Significant Accounting Policies” of the notes to the consolidated financial statements included as a part of the Company’s most recent Annual Report on Form 10-K, filed with the SEC on March 7, 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 Credit Losses
In accordance with ASC 326, Financial Instruments - Credit Losses, the allowance for credit losses 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 the loans. Loans are charged against the allowance for credit losses when management determines all or a portion of the loan balance 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
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for credit loss. Under the new guidance, the allowance for credit losses on off-balance sheet credit exposures is a liability account representing expected credit losses over the contractual period for which the Company is exposed to credit risk resulting from an off-balance sheet exposure.
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 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 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 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 position, 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,
41
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 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.
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,
41
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 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.
42
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 | | ||||||||||||||||||||||||||
| | June 30, | | March 31, | | December 31, | | September 30, | | June 30, | | | September 30, | | June 30, | | March 31, | | December 31, | | September 30, | | ||||||||||
(dollars in thousands, except per share data) | | 2023 | | 2023 | | 2022 | | 2022 | | 2022 | | | 2023 | | 2023 | | 2023 | | 2022 | | 2022 | | ||||||||||
Per Common Share Data | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Basic Earnings Per Share | | $ | 0.32 | | $ | 0.38 | | $ | 0.46 | | $ | 0.49 | | $ | 0.43 | | | $ | 0.31 | | $ | 0.32 | | $ | 0.38 | | $ | 0.46 | | $ | 0.49 | |
Diluted Earnings Per Share | | | 0.31 | | | 0.37 | | | 0.45 | | | 0.47 | | | 0.41 | | | | 0.30 | | | 0.31 | | | 0.37 | | | 0.45 | | | 0.47 | |
Book Value Per Share | | | 12.25 | | | 12.05 | | | 11.80 | | | 11.44 | | | 11.14 | | | | 12.47 | | | 12.25 | | | 12.05 | | | 11.80 | | | 11.44 | |
Tangible Book Value Per Share (1) | | | 12.15 | | | 11.95 | | | 11.69 | | | 11.33 | | | 11.03 | | | | 12.37 | | | 12.15 | | | 11.95 | | | 11.69 | | | 11.33 | |
Basic Weighted Average Shares Outstanding | | | 27,886,425 | | | 27,726,894 | | | 27,558,983 | | | 27,520,117 | | | 27,839,260 | | | | 27,943,409 | | | 27,886,425 | | | 27,726,894 | | | 27,558,983 | | | 27,520,117 | |
Diluted Weighted Average Shares Outstanding | | | 28,198,739 | | | 28,490,046 | | | 28,527,306 | | | 28,592,854 | | | 28,803,842 | | | | 28,311,778 | | | 28,198,739 | | | 28,490,046 | | | 28,527,306 | | | 28,592,854 | |
Shares Outstanding at Period End | | | 27,973,995 | | | 27,845,244 | | | 27,751,950 | | | 27,587,978 | | | 27,677,372 | | | | 28,015,505 | | | 27,973,995 | | | 27,845,244 | | | 27,751,950 | | | 27,587,978 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Selected Performance Ratios | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Return on Average Assets (Annualized) | | | 0.88 | % | | 1.07 | % | | 1.28 | % | | 1.46 | % | | 1.38 | % | ||||||||||||||||
Pre-Provision Net Revenue Return on Average Assets (Annualized) (1) | | | 1.16 | | | 1.49 | | | 1.82 | | | 2.15 | | | 2.19 | | ||||||||||||||||
Return on Average Shareholders' Equity (Annualized) | | | 9.69 | | | 11.70 | | | 14.06 | | | 14.99 | | | 13.55 | | ||||||||||||||||
Return on Average Tangible Common Equity (Annualized) (1) | | | 10.48 | | | 12.90 | | | 15.86 | | | 17.03 | | | 15.26 | | ||||||||||||||||
Return on Average Assets (2) | | | 0.85 | % | | 0.88 | % | | 1.07 | % | | 1.28 | % | | 1.46 | % | ||||||||||||||||
Pre-Provision Net Revenue Return on Average Assets (1)(2) | | | 1.01 | | | 1.16 | | | 1.49 | | | 1.82 | | | 2.15 | | ||||||||||||||||
Return on Average Shareholders' Equity (2) | | | 9.23 | | | 9.69 | | | 11.70 | | | 14.06 | | | 14.99 | | ||||||||||||||||
Return on Average Tangible Common Equity (1)(2) | | | 9.92 | | | 10.48 | | | 12.90 | | | 15.86 | | | 17.03 | | ||||||||||||||||
Yield on Interest Earning Assets | | | 5.06 | | | 4.91 | | | 4.67 | | | 4.37 | | | 4.16 | | | | 5.14 | | | 5.06 | | | 4.91 | | | 4.67 | | | 4.37 | |
Yield on Total Loans, Gross | | | 5.19 | | | 5.06 | | | 4.87 | | | 4.59 | | | 4.45 | | | | 5.26 | | | 5.19 | | | 5.06 | | | 4.87 | | | 4.59 | |
Cost of Interest Bearing Liabilities | | | 3.59 | | | 3.03 | | | 2.22 | | | 1.30 | | | 0.86 | | | | 3.81 | | | 3.59 | | | 3.03 | | | 2.22 | | | 1.30 | |
Cost of Funds | | | 2.91 | | | 2.41 | | | 1.67 | | | 0.93 | | | 0.63 | | | | 3.10 | | | 2.91 | | | 2.41 | | | 1.67 | | | 0.93 | |
Cost of Total Deposits | | | 2.66 | | | 2.01 | | | 1.31 | | | 0.73 | | | 0.46 | | | | 2.99 | | | 2.66 | | | 2.01 | | | 1.31 | | | 0.73 | |
Net Interest Margin | | | 2.40 | | | 2.72 | | | 3.16 | | | 3.53 | | | 3.58 | | | | 2.32 | | | 2.40 | | | 2.72 | | | 3.16 | | | 3.53 | |
Core Net Interest Margin | | | 2.31 | | | 2.62 | | | 3.05 | | | 3.38 | | | 3.34 | | | | 2.24 | | | 2.31 | | | 2.62 | | | 3.05 | | | 3.38 | |
Efficiency Ratio (1) | | | 52.7 | | | 46.2 | | | 43.8 | | | 39.8 | | | 40.2 | | | | 56.5 | | | 52.7 | | | 46.2 | | | 43.8 | | | 39.8 | |
Noninterest Expense to Average Assets (Annualized) | | | 1.29 | | | 1.31 | | | 1.42 | | | 1.42 | | | 1.47 | | ||||||||||||||||
Noninterest Expense to Average Assets (2) | | | 1.35 | | | 1.29 | | | 1.31 | | | 1.42 | | | 1.42 | | ||||||||||||||||
Loan to Deposit Ratio | | | 104.4 | | | 108.0 | | | 104.5 | | | 102.3 | | | 100.7 | | | | 101.3 | | | 104.4 | | | 108.0 | | | 104.5 | | | 102.3 | |
Core Deposits to Total Deposits | | | 70.3 | | | 72.4 | | | 74.6 | | | 83.0 | | | 82.9 | | | | 70.3 | | | 70.3 | | | 72.4 | | | 74.6 | | | 83.0 | |
Tangible Common Equity to Tangible Assets (1) | | | 7.39 | | | 7.23 | | | 7.48 | | | 7.57 | | | 7.87 | | | | 7.61 | | | 7.39 | | | 7.23 | | | 7.48 | | | 7.57 | |
(1) | Represents a non-GAAP financial measure. See "Non-GAAP Financial Measures" for further details. |
(2) | Annualized. |
(3) | Amounts calculated on a tax-equivalent basis using the statutory federal tax rate of 21%. |
Core deposits are defined as total deposits less brokered deposits and certificates of deposit greater than $250,000. |
43
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 | ||||||||||||||||||||||||||
| | June 30, | | March 31, | | December 31, | | September 30, | | June 30, | | September 30, | | June 30, | | March 31, | | December 31, | | September 30, | ||||||||||
(dollars in thousands) |
| 2023 |
| 2023 | | 2022 | | 2022 |
| 2022 |
| 2023 |
| 2023 | | 2023 | | 2022 |
| 2022 | ||||||||||
Selected Balance Sheet Data | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total Assets | | $ | 4,603,185 | | $ | 4,602,899 | | $ | 4,345,662 | | $ | 4,128,987 | | $ | 3,883,264 | | $ | 4,557,070 | | $ | 4,603,185 | | $ | 4,602,899 | | $ | 4,345,662 | | $ | 4,128,987 |
Total Loans, Gross | | | 3,736,211 | | | 3,684,360 | | | 3,569,446 | | | 3,380,082 | | | 3,225,885 | | | 3,722,271 | | | 3,736,211 | | | 3,684,360 | | | 3,569,446 | | | 3,380,082 |
Allowance for Credit Losses | | | 50,701 | | | 50,148 | | | 47,996 | | | 46,491 | | | 44,711 | | | 50,585 | | | 50,701 | | | 50,148 | | | 47,996 | | | 46,491 |
Goodwill and Other Intangibles | | | 2,832 | | | 2,866 | | | 2,914 | | | 2,962 | | | 3,009 | | | 2,823 | | | 2,832 | | | 2,866 | | | 2,914 | | | 2,962 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Deposits | | | 3,577,932 | | | 3,411,123 | | | 3,416,543 | | | 3,305,074 | | | 3,201,953 | | | 3,675,509 | | | 3,577,932 | | | 3,411,123 | | | 3,416,543 | | | 3,305,074 |
Tangible Common Equity (1) | | | 339,780 | | | 332,626 | | | 324,636 | | | 312,531 | | | 305,360 | | | 346,623 | | | 339,780 | | | 332,626 | | | 324,636 | | | 312,531 |
Total Shareholders' Equity | | | 409,126 | | | 402,006 | | | 394,064 | | | 382,007 | | | 374,883 | | | 415,960 | | | 409,126 | | | 402,006 | | | 394,064 | | | 382,007 |
Average Total Assets - Quarter-to-Date | | | 4,483,662 | | | 4,405,234 | | | 4,251,345 | | | 3,948,201 | | | 3,743,575 | | | 4,504,937 | | | 4,483,662 | | | 4,405,234 | | | 4,251,345 | | | 3,948,201 |
Average Shareholders' Equity - Quarter-to-Date | | | 406,347 | | | 403,533 | | | 387,589 | | | 384,020 | | | 381,448 | | | 414,047 | | | 406,347 | | | 403,533 | | | 387,589 | | | 384,020 |
(1) | Represents a non-GAAP financial measure. See “Non-GAAP Financial Measures” for further details. |
| | | | | | | | | | | | | | | |
| | For the Three Months Ended | |||||||||||||
| | June 30, | | March 31, | | December 31, | | September 30, | | June 30, | |||||
(dollars in thousands) |
| 2023 |
| 2023 | | 2022 | | 2022 |
| 2022 | |||||
Selected Income Statement Data | | | | | | | | | | | | | | | |
Interest Income | | $ | 55,001 | | $ | 51,992 | | $ | 48,860 | | $ | 42,359 | | $ | 37,782 |
Interest Expense | | | 29,129 | | | 23,425 | | | 15,967 | | | 8,264 | | | 5,252 |
Net Interest Income | | | 25,872 | | | 28,567 | | | 32,893 | | | 34,095 | | | 32,530 |
Provision for Credit Losses | | | 50 | | | 625 | | | 1,500 | | | 1,500 | | | 3,025 |
Net Interest Income after Provision for Credit Losses | | | 25,822 | | | 27,942 | | | 31,393 | | | 32,595 | | | 29,505 |
Noninterest Income | | | 1,415 | | | 1,943 | | | 1,738 | | | 1,387 | | | 1,650 |
Noninterest Expense | | | 14,388 | | | 14,183 | | | 15,203 | | | 14,157 | | | 13,752 |
Income Before Income Taxes | | | 12,849 | | | 15,702 | | | 17,928 | | | 19,825 | | | 17,403 |
Provision for Income Taxes | | | 3,033 | | | 4,060 | | | 4,193 | | | 5,312 | | | 4,521 |
Net Income | | | 9,816 | | | 11,642 | | | 13,735 | | | 14,513 | | | 12,882 |
Preferred Stock Dividends | | | (1,014) | | | (1,013) | | | (1,014) | | | (1,013) | | | (1,014) |
Net Income Available to Common Shareholders | | $ | 8,802 | | $ | 10,629 | | $ | 12,721 | | $ | 13,500 | | $ | 11,868 |
44
Discussion and Analysis of Results of Operations
Net Income
Net income was $9.8 million for the second quarter of 2023, compared to net income of $12.9 million for the second quarter of 2022. Earnings per diluted common share for the second quarter of 2023 were $0.31, compared to $0.41 per diluted common share for the second quarter of 2022. Net income was $21.5 million for the six months ended June 30, 2023, compared to net income of $25.1 million for the six months ended June 30, 2022. Earnings per diluted common share for the six months ended June 30, 2023 was $0.69, compared to $0.80 per diluted common share for the six months ended June 30, 2022.
| | | | | | | | | | | | | | | |
| | For the Three Months Ended | |||||||||||||
| | September 30, | | June 30, | | March 31, | | December 31, | | September 30, | |||||
(dollars in thousands) |
| 2023 |
| 2023 | | 2023 | | 2022 |
| 2022 | |||||
Selected Income Statement Data | | | | | | | | | | | | | | | |
Interest Income | | $ | 56,809 | | $ | 55,001 | | $ | 51,992 | | $ | 48,860 | | $ | 42,359 |
Interest Expense | | | 31,388 | | | 29,129 | | | 23,425 | | | 15,967 | | | 8,264 |
Net Interest Income | | | 25,421 | | | 25,872 | | | 28,567 | | | 32,893 | | | 34,095 |
Provision for (Recovery of) Credit Losses | | | (600) | | | 50 | | | 625 | | | 1,500 | | | 1,500 |
Net Interest Income after Provision for Credit Losses | | | 26,021 | | | 25,822 | | | 27,942 | | | 31,393 | | | 32,595 |
Noninterest Income | | | 1,726 | | | 1,415 | | | 1,943 | | | 1,738 | | | 1,387 |
Noninterest Expense | | | 15,350 | | | 14,388 | | | 14,183 | | | 15,203 | | | 14,157 |
Income Before Income Taxes | | | 12,397 | | | 12,849 | | | 15,702 | | | 17,928 | | | 19,825 |
Provision for Income Taxes | | | 2,768 | | | 3,033 | | | 4,060 | | | 4,193 | | | 5,312 |
Net Income | | | 9,629 | | | 9,816 | | | 11,642 | | | 13,735 | | | 14,513 |
Preferred Stock Dividends | | | (1,013) | | | (1,014) | | | (1,013) | | | (1,014) | | | (1,013) |
Net Income Available to Common Shareholders | | $ | 8,616 | | $ | 8,802 | | $ | 10,629 | | $ | 12,721 | | $ | 13,500 |
44
Discussion and Analysis of Results of Operations
Net Income
Net income was $9.6 million for the third quarter of 2023, compared to net income of $14.5 million for the third quarter of 2022. Earnings per diluted common share for the third quarter of 2023 were $0.30, compared to $0.47 per diluted common share for the third quarter of 2022. Net income was $31.1 million for the nine months ended September 30, 2023, compared to net income of $39.7 million for the nine months ended September 30, 2022. Earnings per diluted common share for the nine months ended September 30, 2023 were $0.99, compared to $1.27 per diluted common share for the nine months ended September 30, 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 Company’s primary source of earnings.
45
Average Balances and Yields
The following tables present, for the three and nine months ended September 30, 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 |
| ||||||||||||||
| | September 30, 2023 | | September 30, 2022 |
| ||||||||||||
| | Average | | Interest | | Yield/ | | Average | | Interest | | Yield/ |
| ||||
|
| Balance |
| & Fees |
| Rate |
| Balance |
| & Fees |
| Rate |
| ||||
(dollars in thousands) | | | | | | | | | | | | | | | | | |
Interest Earning Assets: | | | | | | | | | | | | | | | | | |
Cash Investments | | $ | 81,038 | | $ | 903 | | 4.42 | % | $ | 57,613 | | $ | 165 | | 1.13 | % |
Investment Securities: | | | | | | | | | | | | | | | | | |
Taxable Investment Securities | |
| 565,008 | |
| 6,234 | | 4.38 | |
| 461,255 | |
| 3,741 | | 3.22 | |
Tax-Exempt Investment Securities (1) | |
| 29,955 | |
| 346 | | 4.58 | |
| 75,801 | |
| 799 | | 4.18 | |
Total Investment Securities | |
| 594,963 | |
| 6,580 | | 4.39 | |
| 537,056 | |
| 4,540 | | 3.35 | |
Paycheck Protection Program Loans (2) | |
| 828 | | | 2 | | 1.00 | |
| 2,424 | | | 96 | | 15.75 | |
Loans (1)(2) | | | 3,721,766 | | | 49,324 | | 5.26 | | | 3,263,390 | | | 37,724 | | 4.59 | |
Total Loans | |
| 3,722,594 | |
| 49,326 | | 5.26 | |
| 3,265,814 | |
| 37,820 | | 4.59 | |
Federal Home Loan Bank Stock | |
| 17,829 | | | 400 | | 8.89 | |
| 11,413 | | | 156 | | 5.42 | |
Total Interest Earning Assets | |
| 4,416,424 | |
| 57,209 | | 5.14 | % |
| 3,871,896 | |
| 42,681 | | 4.37 | % |
Noninterest Earning Assets | | | 88,513 | | | | | | | | 76,305 | | | | | | |
Total Assets | | $ | 4,504,937 | | | | | | | $ | 3,948,201 | | | | | | |
Interest Bearing Liabilities: | | | | | | | | | | | | | | | | | |
Deposits: | | | | | | | | | | | | | | | | | |
Interest Bearing Transaction Deposits | | $ | 730,244 | | $ | 7,136 | | 3.88 | % | $ | 517,658 | | $ | 1,032 | | 0.79 | % |
Savings and Money Market Deposits | |
| 874,612 | | | 8,089 | | 3.67 | |
| 999,932 | | | 2,494 | | 0.99 | |
Time Deposits | |
| 266,635 | | | 1,962 | | 2.92 | |
| 288,621 | | | 847 | | 1.16 | |
Brokered Deposits | |
| 985,276 | | | 10,038 | | 4.04 | |
| 447,034 | | | 1,612 | | 1.43 | |
Total Interest Bearing Deposits | | | 2,856,767 | | | 27,225 | | 3.78 | | | 2,253,245 | | | 5,985 | | 1.05 | |
Federal Funds Purchased | |
| 39,641 | | | 548 | | 5.48 | |
| 106,826 | | | 709 | | 2.63 | |
Notes Payable | |
| 13,750 | | | 296 | | 8.58 | |
| — | | | — | | — | |
FHLB Advances | |
| 275,261 | | | 2,316 | | 3.34 | |
| 72,343 | | | 328 | | 1.80 | |
Subordinated Debentures | |
| 79,137 | | | 1,003 | | 5.03 | |
| 92,503 | | | 1,242 | | 5.33 | |
Total Interest Bearing Liabilities | |
| 3,264,556 | |
| 31,388 | | 3.81 | % |
| 2,524,917 | |
| 8,264 | | 1.30 | % |
Noninterest Bearing Liabilities: | | | | | | | | | | | | | | | | | |
Noninterest Bearing Transaction Deposits | |
| 754,567 | | | | | | |
| 991,545 | | | | | | |
Other Noninterest Bearing Liabilities | | | 71,767 | | | | | | | | 47,719 | | | | | | |
Total Noninterest Bearing Liabilities | |
| 826,334 | | | | | | |
| 1,039,264 | | | | | | |
Shareholders' Equity | | | 414,047 | | | | | | | | 384,020 | | | | | | |
Total Liabilities and Shareholders' Equity | | $ | 4,504,937 | | | | | | | $ | 3,948,201 | | | | | | |
Net Interest Income / Interest Rate Spread | | | | |
| 25,821 | | 1.33 | % | | | |
| 34,417 | | 3.07 | % |
Net Interest Margin (3) | | | | | | | | 2.32 | % | | | | | | | 3.53 | % |
Taxable Equivalent Adjustment: | | | | | | | | | | | | | | | | | |
Tax-Exempt Investment Securities and Loans | | | | |
| (400) | | | | | | |
| (322) | | | |
Net Interest Income | | | | | $ | 25,421 | | | | | | | $ | 34,095 | | | |
(1) | Interest income and average rates for tax-exempt investment securities and loans are presented on a tax-equivalent basis,
|
(2) | Average
|