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 ~~June 30, 2020~~March 31, 2021

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

For the transition period from ____________ to ________

Commission File Number 001-38412

BRIDGEWATER BANCSHARES, INC.

(Exact name of registrant as specified in its charter)


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

~~3800 American~~4450 Excelsior Boulevard, ~~West,~~ Suite 100 ~~Bloomington~~St. Louis Park, Minnesota (Address of principal executive offices)		~~55431~~55416 (Zip Code)

(952) 893-6868

(Registrant’s telephone number, including area code)

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

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

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


Large accelerated filer	☐	Accelerated filer	☒

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

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

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

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


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

The number of shares of the Common Stock outstanding as of ~~August~~May 3, ~~2020~~2021 was ~~28,842,560~~28,142,929.

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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,		March 31,		December 31,
	2020		2019		2021		2020
	(Unaudited)				(Unaudited)
ASSETS
Cash and Cash Equivalents	$	178,428	$	31,935	$	200,896	$	160,675
Bank-Owned Certificates of Deposit		2,895		2,654		2,369		2,860
Securities Available for Sale, at Fair Value		326,295		289,877		397,326		390,629
Loans, Net of Allowance for Loan Losses of $27,633 at June 30, 2020 (unaudited) and $22,526 at December 31, 2019		2,155,858		1,884,000
Loans, Net of Allowance for Loan Losses of $35,987 at March 31, 2021 (unaudited) and $34,841 at December 31, 2020						2,378,863		2,282,436
Federal Home Loan Bank (FHLB) Stock, at Cost		8,617		7,824		5,820		5,027
Premises and Equipment, Net		43,062		27,628		51,297		50,987
Accrued Interest		8,267		6,775		8,718		9,172
Goodwill		2,626		2,626		2,626		2,626
Other Intangible Assets, Net		765		861		622		670
Other Assets		27,650		14,650		23,822		22,263
Total Assets	$	2,754,463	$	2,268,830	$	3,072,359	$	2,927,345

LIABILITIES AND EQUITY
LIABILITIES
Deposits:
Noninterest Bearing	$	648,869	$	447,509	$	712,999	$	671,903
Interest Bearing		1,593,182		1,375,801		1,925,655		1,829,733
Total Deposits		2,242,051		1,823,310		2,638,654		2,501,636
Notes Payable		12,000		13,000		—		11,000
FHLB Advances		147,500		136,500		57,500		57,500
Subordinated Debentures, Net of Issuance Costs		73,658		24,733		73,826		73,739
Accrued Interest Payable		1,953		1,982		1,736		1,615
Other Liabilities		20,111		24,511		21,472		16,450
Total Liabilities		2,497,273		2,024,036		2,793,188		2,661,940

SHAREHOLDERS' EQUITY
Preferred Stock- $0.01 par value
Authorized 10,000,000; NaN Issued and Outstanding at June 30, 2020 (unaudited) and December 31, 2019		—		—
Authorized 10,000,000; NaN Issued and Outstanding at March 31, 2021 (unaudited) and December 31, 2020						—		—
Common Stock- $0.01 par value
Common Stock - Authorized 75,000,000; Issued and Outstanding 28,837,560 at June 30, 2020 (unaudited) and 28,973,572 at December 31, 2019		288		290
Common Stock - Authorized 75,000,000; Issued and Outstanding 28,132,929 at March 31, 2021 (unaudited) and 28,143,493 at December 31, 2020						281		281
Additional Paid-In Capital		110,906		112,093		104,087		103,714
Retained Earnings		142,678		127,637		165,502		154,831
Accumulated Other Comprehensive Income		3,318		4,774		9,301		6,579
Total Shareholders' Equity		257,190		244,794		279,171		265,405
Total Liabilities and Equity	$	2,754,463	$	2,268,830	$	3,072,359	$	2,927,345

See accompanying notes to consolidated financial statements.

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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,		Three Months Ended
	2020		2019		2020		2019		March 31,		March 31,
	(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)		2021		2020
INTEREST INCOME
Loans, Including Fees	$	25,913	$	23,321	$	51,026	$	45,500	$	27,908	$	25,113
Investment Securities		2,091		1,928		4,287		3,829		2,420		2,196
Other		162		271		321		458		112		159
Total Interest Income		28,166		25,520		55,634		49,787		30,440		27,468

INTEREST EXPENSE
Deposits		5,170		6,020		10,894		11,723		3,671		5,724
Notes Payable		111		130		226		251		61		115
FHLB Advances		1,064		827		2,091		1,602		228		1,027
Subordinated Debentures		479		393		872		770		1,085		393
Federal Funds Purchased		—		12		107		172		—		107
Total Interest Expense		6,824		7,382		14,190		14,518		5,045		7,366

NET INTEREST INCOME		21,342		18,138		41,444		35,269		25,395		20,102
Provision for Loan Losses		3,000		600		5,100		1,200		1,100		2,100

NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES		18,342		17,538		36,344		34,069		24,295		18,002

NONINTEREST INCOME
Customer Service Fees		135		189		375		380		234		240
Net Gain on Sales of Available for Sale Securities		1,361		463		1,364		458		—		3
Other Income		481		482		1,957		930		774		1,476
Total Noninterest Income		1,977		1,134		3,696		1,768		1,008		1,719

NONINTEREST EXPENSE
Salaries and Employee Benefits		6,348		5,124		12,802		9,926		7,102		6,454
Occupancy and Equipment		672		785		1,385		1,441		1,055		713
Other Expense		3,691		3,565		6,270		5,992		2,766		2,579
Total Noninterest Expense		10,711		9,474		20,457		17,359		10,923		9,746

INCOME BEFORE INCOME TAXES		9,608		9,198		19,583		18,478		14,380		9,975
Provision for Income Taxes		2,010		1,189		4,542		3,451		3,709		2,532
NET INCOME	$	7,598	$	8,009	$	15,041	$	15,027	$	10,671	$	7,443

EARNINGS PER SHARE
Basic	$	0.26	$	0.27	$	0.52	$	0.50	$	0.38	$	0.26
Diluted		0.26		0.26		0.51		0.49		0.37		0.25
Dividends Paid Per Share		—		—		—		—		—		—

See accompanying notes to consolidated financial statements.

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Bridgewater Bancshares, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income

(dollars in thousands)

(Unaudited)


	Three Months Ended				Six Months Ended				Three Months Ended
	June 30,				June 30,				March 31,
	2020		2019		2020		2019		2021		2020
Net Income	$	7,598	$	8,009	$	15,041	$	15,027	$	10,671	$	7,443
Other Comprehensive Income (Loss):
Unrealized Gains on Available for Sale Securities		3,300		3,586		3,122		8,203
Unrealized Losses on Cash Flow Hedges		(741)		(927)		(3,673)		(1,018)
Reclassification Adjustment for Gains Realized in Income		(1,307)		(463)		(1,292)		(458)
Unrealized Losses on Available for Sale Securities										(2,516)		(178)
Unrealized Gains (Losses) on Cash Flow Hedges										5,605		(2,932)
Reclassification Adjustment for Losses Realized in Income										328		15
Income Tax Impact		(263)		(461)		387		(1,411)		(695)		650
Total Other Comprehensive Income (Loss), Net of Tax		989		1,735		(1,456)		5,316		2,722		(2,445)
Comprehensive Income	$	8,587	$	9,744	$	13,585	$	20,343	$	13,393	$	4,998

See accompanying notes to consolidated financial statements.

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Bridgewater Bancshares, Inc. and Subsidiaries

Consolidated Statements of Shareholders’ Equity

Three ~~and Six~~ Months Ended ~~June 30,~~March 31, 2021 and 2020 ~~and 2019~~

(dollars in thousands, except share data)

(Unaudited)


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

BALANCE March 31, 2019	30,097,674	$	301	$	126,209	$	103,252	$	2,013	$	231,775
BALANCE December 31, 2019												28,973,572	$	290	$	112,093	$	127,637	$	4,774	$	244,794
Stock-based Compensation												7,721		—		401		—		—		401
Comprehensive Income (Loss)												—		—		—		7,443		(2,445)		4,998
Stock Repurchases												(177,864)		(2)		(2,048)		—		—		(2,050)
Issuance of Restricted Stock Awards												3,946		—		—		—		—		—
BALANCE March 31, 2020												28,807,375	$	288	$	110,446	$	135,080	$	2,329	$	248,143

BALANCE December 31, 2020												28,143,493	$	281	$	103,714	$	154,831	$	6,579	$	265,405
Stock-based Compensation	—		—		173		—		—		173	5,008		—		574		—		—		574
Comprehensive Income	—		—		—		8,009		1,735		9,744	—		—		—		10,671		2,722		13,393
Stock Options Exercised	15,000		—		59		—		—		59	1,400		—		12		—		—		12
Stock Repurchases	(1,125,945)		(11)		(12,603)		—		—		(12,614)	(16,618)		—		(208)		—		—		(208)
BALANCE June 30, 2019	28,986,729	$	290	$	113,838	$	111,261	$	3,748	$	229,137
Issuance of Restricted Stock Awards												—		—		—		—		—		—
Restricted Shares Withheld for Taxes												(354)		—		(5)		—		—		(5)
BALANCE March 31, 2021												28,132,929	$	281	$	104,087	$	165,502	$	9,301	$	279,171

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

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

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

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

See accompanying notes to consolidated financial statements.

Table of Contents

Bridgewater Bancshares, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(dollars in thousands)

(Unaudited)


	Six Months Ended				Three Months Ended
	June 30,				March 31,
	2020		2019		2021		2020
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income	$	15,041	$	15,027	$	10,671	$	7,443
Adjustments to Reconcile Net Income to Net Cash
Provided by (Used for) Operating Activities:
Net Amortization on Securities Available for Sale		1,136		1,225		814		580
Net Gain on Sales of Securities Available for Sale		(1,364)		(458)		—		(3)
Provision for Loan Losses		5,100		1,200		1,100		2,100
Depreciation and Amortization of Premises and Equipment		380		417
Depreciation of Premises and Equipment						554		187
Amortization of Other Intangible Assets		96		95		48		48
Amortization of Subordinated Debt Issuance Costs		52		51		87		26
Stock-based Compensation		822		348		574		401
Changes in Operating Assets and Liabilities:
Accrued Interest Receivable and Other Assets		(8,074)		(1,499)		1,141		(5,207)
Accrued Interest Payable and Other Liabilities		(12,507)		3,870		6,295		(7,736)
Net Cash Provided by Operating Activities		682		20,276
Net Cash Provided (Used) by Operating Activities						21,284		(2,161)

CASH FLOWS FROM INVESTING ACTIVITIES
(Increase) Decrease in Bank-owned Certificates of Deposit		(241)		606		491		(241)
Proceeds from Sales of Securities Available for Sale		34,038		40,309		1,650		2,102
Proceeds from Maturities, Paydowns, Payups and Calls of Securities Available for Sale		17,312		15,741		8,838		10,545
Purchases of Securities Available for Sale		(87,215)		(37,618)		(18,674)		(23,902)
Net Increase in Loans		(277,092)		(120,232)		(97,527)		(91,130)
Net Increase in FHLB Stock		(793)		(450)		(793)		(3,193)
Purchases of Premises and Equipment		(15,935)		(5,966)		(864)		(7,830)
Proceeds from Sales of Foreclosed Assets		134		—		—		134
Net Cash Used in Investing Activities		(329,792)		(107,610)		(106,879)		(113,515)

CASH FLOWS FROM FINANCING ACTIVITIES
Net Increase in Deposits		418,741		138,331		137,017		76,817
Net Decrease in Federal Funds Purchased		—		(18,000)
Principal Payments on Notes Payable		(1,000)		(1,000)		(11,000)		(500)
Proceeds from FHLB Advances		96,000		22,500		—		76,000
Principal Payments on FHLB Advances		(85,000)		(4,000)		—		(5,000)
Issuance of Subordinated Debt, net of Issuance Costs		48,873		—
Stock Options Exercised		39		62		12		—
Stock Repurchases		(2,050)		(12,614)		(208)		(2,050)
Shares Repurchased for Tax Withholdings Upon Vesting of Restricted Stock-Based Awards						(5)		—
Net Cash Provided by Financing Activities		475,603		125,279		125,816		145,267

NET CHANGE IN CASH AND CASH EQUIVALENTS		146,493		37,945		40,221		29,591
Cash and Cash Equivalents Beginning		31,935		28,444		160,675		31,935
Cash and Cash Equivalents Ending	$	178,428	$	66,389	$	200,896	$	61,526

SUPPLEMENTAL CASH FLOW DISCLOSURE
Cash Paid for Interest	$	14,167	$	14,164	$	4,837	$	7,633
Cash Paid for Income Taxes		4,243		2,600		295		430
Loans Transferred to Foreclosed Assets		134		1,033		—		134
Premises and Equipment Transferred to Other Assets		121		—
Net Investment Securities Sold but Not Settled		1,433		—
Net Investment Securities Purchased but Not Settled						1,840		6,944

See accompanying notes to consolidated financial statements.

Table of Contents

Bridgewater Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(dollars in thousands, except share data)

(Unaudited)

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

Organization

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

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

Basis of Presentation

The accompanying unaudited consolidated financial statements were prepared in accordance with instructions for Form 10-Q and, therefore, do not include all disclosures necessary for a complete presentation of the consolidated balance sheets, consolidated statements of income, consolidated statements of comprehensive income, consolidated statements of shareholders’ equity and consolidated statements of cash flows in conformity with U.S. generally accepted accounting principles (“GAAP”). However, all normal recurring adjustments which are, in the opinion of management, necessary for the fair presentation of the interim financial statements have been included. The results of operations for the ~~three and six-month periods~~three-month period ended ~~June 30, 2020~~March 31, 2021 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 ~~12, 2020.~~11, 2021.

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 COVID-19 pandemic related changes, and changes in the financial condition of borrowers.

Table of Contents

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

Emerging Growth Company

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

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

~~Paycheck Protection Program Loan Segment~~

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

Impact of Recently Adopted Accounting Guidance

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

~~Table of Contents~~

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

~~In August 2018,~~December 2019, the FASB issued ASU ~~2018-13,~~2019-12, ~~Fair Value Measurement~~Income Taxes (Topic ~~820)~~740): ~~Disclosure Framework – Changes~~Simplifying the Accounting for Income Taxes. This ASU aims to simplify the accounting for income taxes by removing certain exceptions to the ~~Disclosure Requirements for Fair Value Measurement.~~ ~~The amendments~~general principles and also simplification of ~~this ASU modify the disclosure requirements for fair value measurements by removing, modifying,~~areas such as franchise taxes, step-up in tax basis goodwill, separate entity financial statements and interim recognition of enactment of tax laws or ~~adding certain disclosures.~~rate changes. The Company adopted this standard during the first quarter of ~~2020~~2021 and the adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

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

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

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

~~(i)~~

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

~~(ii)~~

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

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

~~Table of Contents~~

~~Impact of Recently Issued Accounting Standards~~

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

In January 2020, the FASB issued ASU 2020-01, Investments – Equity Securities (Topic 321), Investments – Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815): Clarifying the Interactions between Topic 321, Topic 323 and Topic 815. This ASU clarifies that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting for the purposes of applying the fair value measurement alternative. The ~~ASU will be effective for fiscal years,~~Company adopted this standard during the first quarter of 2021 and ~~interim periods within those fiscal years, beginning after December 15, 2020, with early~~the adoption ~~permitted. The Company does~~of this standard did not ~~expect adoption to~~ have a material impact on ~~the consolidated financial statements.~~

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

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

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

Subsequent Events

Subsequent events have been evaluated through ~~August~~May 6, ~~2020,~~2021, which is the date the consolidated financial statements were available to be issued.

119

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Note 2: Earnings Per Share

Basic earnings per common share are computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted earnings per common share are ~~calculated~~computed by dividing net income by the weighted average number of shares adjusted for the dilutive effect of stock compensation. For the three ~~and six~~ months ended ~~June 30,~~March 31, 2021 and 2020, 314,800 and 306,946, respectively, of stock options, restricted stock awards and restricted stock ~~awards of approximately 561,000 and 560,000, respectively,~~units were excluded from the calculation because ~~their effect would have been anti-dilutive. For the three and six months ended June 30, 2019, stock options of approximately 135,000~~they were ~~excluded from the calculation because their effect would have been anti-dilutive.~~deemed to be antidilutive.

The following table presents the numerators and denominators for basic and diluted earnings per share computations for the three ~~and six~~ months ended ~~June 30, 2020~~March 31, 2021 and ~~2019:~~2020:


	Three Months Ended					Six Months Ended				Three Months Ended
	June 30,					June 30,				March 31,
	2020			2019		2020		2019		2021		2020
Net Income Available to Common Shareholders	$	7,598		$	8,009	$	15,041	$	15,027	$	10,671	$	7,443
Weighted Average Common Stock Outstanding:
Weighted Average Common Stock Outstanding (Basic)		28,676,441	��		29,703,024		28,733,968		29,899,241		28,017,366		28,791,494
Dilutive Effect of Stock Compensation		488,716			609,015		616,458		610,939		927,846		710,751
Weighted Average Common Stock Outstanding (Dilutive)		29,165,157			30,312,039		29,350,426		30,510,180		28,945,212		29,502,245

Basic Earnings per Common Share	$	0.26		$	0.27	$	0.52	$	0.50	$	0.38	$	0.26
Diluted Earnings per Common Share		0.26			0.26		0.51		0.49		0.37		0.25

Note 3: Securities

The following tables present the amortized cost and estimated fair value of securities with gross unrealized gains and losses at ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019:~~2020:


	June 30, 2020								March 31, 2021
			Gross		Gross						Gross		Gross
	Amortized		Unrealized		Unrealized				Amortized		Unrealized		Unrealized
	Cost		Gains		Losses		Fair Value		Cost		Gains		Losses		Fair Value
Securities Available for Sale:
U.S. Treasury Securities									$	1,010	$	1	$	—	$	1,011
Municipal Bonds	$	93,780	$	7,705	$	(763)	$	100,722		115,544		7,773		(1,195)		122,122
Mortgage-Backed Securities		92,800		2,159		(335)		94,624		123,913		1,566		(2,213)		123,266
Corporate Securities		55,258		898		(526)		55,630		72,038		2,155		(122)		74,071
SBA Securities		44,599		19		(564)		44,054		38,327		42		(318)		38,051
Asset-Backed Securities		31,437		367		(539)		31,265		37,456		1,349		—		38,805
Total Securities Available for Sale	$	317,874	$	11,148	$	(2,727)	$	326,295	$	388,288	$	12,886	$	(3,848)	$	397,326


	December 31, 2019								December 31, 2020
			Gross		Gross						Gross		Gross
	Amortized		Unrealized		Unrealized				Amortized		Unrealized		Unrealized
	Cost		Gains		Losses		Fair Value		Cost		Gains		Losses		Fair Value
Securities Available for Sale:
U.S. Treasury Securities	$	4,990	$	8	$	—	$	4,998
Municipal Bonds		99,441		6,338		(36)		105,743	$	105,975	$	9,373	$	(336)	$	115,012
Mortgage-Backed Securities		64,312		697		(281)		64,728		123,395		2,029		(1,164)		124,260
Corporate Securities		49,674		633		(131)		50,176		71,116		1,240		(201)		72,155
SBA Securities		50,126		35		(602)		49,559		40,455		32		(380)		40,107
Asset-Backed Securities		14,673		—		—		14,673		38,135		976		(16)		39,095
Total Securities Available for Sale	$	283,216	$	7,711	$	(1,050)	$	289,877	$	379,076	$	13,650	$	(2,097)	$	390,629

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Table of Contents

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 ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019:~~2020:


	Less Than 12 Months				12 Months or Greater				Total					Less Than 12 Months				12 Months or Greater				Total
			Unrealized				Unrealized				Unrealized					Unrealized				Unrealized				Unrealized
	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses			Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
June 30, 2020
March 31, 2021													March 31, 2021
Municipal Bonds	$	15,521	$	(756)	$	223	$	(7)	$	15,744	$	(763)		$	27,707	$	(903)	$	6,830	$	(292)	$	34,537	$	(1,195)
Mortgage-Backed Securities		31,775		(299)		13,102		(36)		44,877		(335)			60,731		(2,212)		1,648		(1)		62,379		(2,213)
Corporate Securities		20,692		(526)		—		—		20,692		(526)			12,422		(90)		968		(32)		13,390		(122)
SBA Securities		13,061		(106)		27,121		(458)		40,182		(564)			409		—		25,417		(318)		25,826		(318)
Asset-Backed Securities		17,003		(539)		—		—		17,003		(539)
Total Securities Available for Sale	$	98,052	$	(2,226)	$	40,446	$	(501)	$	138,498	$	(2,727)		$	101,269	$	(3,205)	$	34,863	$	(643)	$	136,132	$	(3,848)


	Less Than 12 Months				12 Months or Greater				Total					Less Than 12 Months				12 Months or Greater				Total
			Unrealized				Unrealized				Unrealized					Unrealized				Unrealized				Unrealized
	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses			Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
December 31, 2019
December 31, 2020													December 31, 2020
Municipal Bonds	$	2,760	$	(23)	$	1,390	$	(13)	$	4,150	$	(36)		$	12,023	$	(329)	$	223	$	(7)	$	12,246	$	(336)
Mortgage-Backed Securities		32,276		(242)		3,098		(39)		35,374		(281)			45,120		(1,163)		1,699		(1)		46,819		(1,164)
Corporate Securities		8,350		(131)		—		—		8,350		(131)			23,643		(131)		2,430		(70)		26,073		(201)
SBA Securities		11,907		(64)		31,036		(538)		42,943		(602)			3,288		(3)		28,193		(377)		31,481		(380)
Asset-Backed Securities															2,471		(16)		—		—		2,471		(16)
Total Securities Available for Sale	$	55,293	$	(460)	$	35,524	$	(590)	$	90,817	$	(1,050)		$	86,545	$	(1,642)	$	32,545	$	(455)	$	119,090	$	(2,097)

At ~~June 30, 2020, 167~~March 31, 2021, 172 debt securities had unrealized losses with aggregate depreciation of approximately ~~1.9%~~2.7% from the Company’s amortized cost basis. At December 31, ~~2019, 110~~2020, 150 debt securities had unrealized losses with aggregate depreciation of approximately ~~1.1%~~1.7% from the Company’s amortized cost basis. These unrealized losses related principally to changes in interest rates and were not due to changes in the financial condition of the issuer, the quality of any underlying assets, or applicable credit enhancements. In analyzing whether unrealized losses on debt securities are other than temporary, management considers whether the securities are issued by a government body or agency, whether a rating agency has downgraded the securities, industry analysts’ reports, the financial condition and performance of the issuer, and the quality of any underlying assets or credit enhancements. Since management has the ability and intent to hold these debt securities for the foreseeable future, no declines were deemed to be other than temporary as of ~~June 30, 2020.~~March 31, 2021.

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 ~~June 30, 2020.~~March 31, 2021. Call date is used when a call of the debt security is expected, determined by the Company when the security has a market value above its amortized cost. Contractual maturities will differ from expected maturities for mortgage-backed, SBA securities and asset-backed securities because borrowers may have the right to call or prepay obligations without penalties.


June 30, 2020	Amortized Cost		Fair Value
March 31, 2021					Amortized Cost		Fair Value
Due in One Year or Less	$	2,680	$	2,699	$	7,226	$	7,291
Due After One Year Through Five Years		44,248		45,376		73,840		76,850
Due After Five Years Through 10 Years		85,119		89,275		68,205		72,435
Due After 10 Years		16,991		19,002		39,321		40,628
Subtotal		149,038		156,352		188,592		197,204
Mortgage-Backed Securities		92,800		94,624		123,913		123,266
SBA Securities		44,599		44,054		38,327		38,051
Asset-Backed Securities		31,437		31,265		37,456		38,805
Totals	$	317,874	$	326,295	$	388,288	$	397,326

As of ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, the securities portfolio was unencumbered.

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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 six~~ months ended ~~June 30, 2020~~March 31, 2021 and ~~2019:~~2020:


	Three Months Ended				Six Months Ended				Three Months Ended
	June 30,				June 30,				March 31,
	2020		2019		2020		2019		2021		2020
Proceeds From Sales of Securities	$	31,936	$	32,159	$	34,038	$	40,309	$	1,650	$	2,102
Gross Gains on Sales		1,435		640		1,438		716		—		3
Gross Losses on Sales		(74)		(177)		(74)		(258)		—		—

Note 4: Loans

The following table presents the components of the loan portfolio at ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019:~~2020:

June 30,

December 31,

2020

2019
Commercial

$
302,536

$
276,035
Paycheck Protection Program

180,228

—
Construction and Land Development

191,768

196,776
Real Estate Mortgage:

1-4 Family Mortgage

289,456

260,611
Multifamily

522,491

515,014
CRE Owner Occupied

73,539

66,584
CRE Non-owner Occupied

627,651

592,545
Total Real Estate Mortgage Loans

1,513,137

1,434,754
Consumer and Other

6,109

4,473
Total Loans, Gross

2,193,778

1,912,038
Allowance for Loan Losses

(27,633)

(22,526)
Net Deferred Loan Fees

(10,287)

(5,512)
Total Loans, Net

$
2,155,858

$
1,884,000

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

Paycheck

Construction

CRE

CRE

Protection

and Land

1--4 Family

Owner

Non-owner

Consumer

Three Months Ended June 30, 2020

Commercial

Program

Development

Mortgage

Multifamily

Occupied

Occupied

and Other

Unallocated

Total
Allowance for Loan Losses:

Beginning Balance

$
3,557

$
—

$
2,131

$
3,202

$
6,556

$
938

$
8,003

$
92

$
106

$
24,585
Provision for Loan Losses

1,633

90

42

74

141

26

320

82

592

3,000
Loans Charged-off

—

—

—

—

—

—

—

(1)

—

(1)
Recoveries of Loans

2

—

—

46

—

—

—

1

—

49
Total Ending Allowance Balance

$
5,192

$
90

$
2,173

$
3,322

$
6,697

$
964

$
8,323

$
174

$
698

$
27,633

Three Months Ended June 30, 2019

Allowance for Loan Losses:

Beginning Balance

$
3,361

$
—

$
2,097

$
2,611

$
4,715

$
790

$
6,349

$
61

$
623

$
20,607
Provision for Loan Losses

(181)

—

148

63

279

54

136

5

96

600
Loans Charged-off

—

—

—

—

—

—

—

(3)

—

(3)
Recoveries of Loans

1

—

1

153

—

—

—

3

—

158
Total Ending Allowance Balance

$
3,181

$
—

$
2,246

$
2,827

$
4,994

$
844

$
6,485

$
66

$
719

$
21,362


	March 31,		December 31,
	2021		2020
Commercial	$	301,023	$	304,220
Paycheck Protection Program		163,258		138,454
Construction and Land Development		193,372		170,217
Real Estate Mortgage:
1-4 Family Mortgage		294,964		294,479
Multifamily		665,415		626,465
CRE Owner Occupied		79,665		75,604
CRE Non-owner Occupied		720,396		709,300
Total Real Estate Mortgage Loans		1,760,440		1,705,848
Consumer and Other		8,030		7,689
Total Loans, Gross		2,426,123		2,326,428
Allowance for Loan Losses		(35,987)		(34,841)
Net Deferred Loan Fees		(11,273)		(9,151)
Total Loans, Net	$	2,378,863	$	2,282,436

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The following table presents the activity in the allowance for loan losses, by segment, for the ~~six~~three months ended ~~June 30, 2020~~March 31, 2021 and ~~2019:~~2020:


			Paycheck		Construction						CRE		CRE										Paycheck		Construction						CRE		CRE
			Protection		and Land		1--4 Family				Owner		Non-owner		Consumer								Protection		and Land		1--4 Family				Owner		Non-owner		Consumer
Six Months Ended June 30, 2020	Commercial		Program		Development		Mortgage		Multifamily		Occupied		Occupied		and Other		Unallocated		Total
Three Months Ended March 31, 2021																					Commercial		Program		Development		Mortgage		Multifamily		Occupied		Occupied		and Other		Unallocated		Total
Allowance for Loan Losses:
Beginning Balance	$	3,058	$	—	$	2,202	$	2,839	$	5,824	$	792	$	6,972	$	85	$	754	$	22,526	$	5,703	$	70	$	2,491	$	3,972	$	9,517	$	1,162	$	10,991	$	203	$	732	$	34,841
Provision for Loan Losses		2,164		90		(29)		435		873		172		1,351		100		(56)		5,100		729		13		282		(76)		339		(7)		35		32		(247)		1,100
Loans Charged-off		(34)		—		—		—		—		—		—		(14)		—		(48)		—		—		—		(5)		—		—		—		(9)		—		(14)
Recoveries of Loans		4		—		—		48		—		—		—		3		—		55		19		—		—		3		—		32		—		6		—		60
Total Ending Allowance Balance	$	5,192	$	90	$	2,173	$	3,322	$	6,697	$	964	$	8,323	$	174	$	698	$	27,633	$	6,451	$	83	$	2,773	$	3,894	$	9,856	$	1,187	$	11,026	$	232	$	485	$	35,987

Six Months Ended June 30, 2019
Three Months Ended March 31, 2020
Allowance for Loan Losses:
Beginning Balance	$	2,898	$	—	$	2,451	$	2,597	$	4,644	$	808	$	5,872	$	65	$	696	$	20,031	$	3,058	$	—	$	2,202	$	2,839	$	5,824	$	792	$	6,972	$	85	$	754	$	22,526
Provision for Loan Losses		299		—		(206)		68		350		36		613		17		23		1,200		531		—		(71)		361		732		146		1,031		18		(648)		2,100
Loans Charged-off		(19)		—		—		—		—		—		—		(20)		—		(39)		(34)		—		—		—		—		—		—		(13)		—		(47)
Recoveries of Loans		3		—		1		162		—		—		—		4		—		170		2		—		—		2		—		—		—		2		—		6
Total Ending Allowance Balance	$	3,181	$	—	$	2,246	$	2,827	$	4,994	$	844	$	6,485	$	66	$	719	$	21,362	$	3,557	$	—	$	2,131	$	3,202	$	6,556	$	938	$	8,003	$	92	$	106	$	24,585

The following tables present the balance in the allowance for loan losses and the recorded investment in loans, by segment, based on impairment method as of ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019:~~2020:


			Paycheck		Construction						CRE		CRE										Paycheck		Construction						CRE		CRE
			Protection		and Land		1--4 Family				Owner		Non-owner		Consumer								Protection		and Land		1--4 Family				Owner		Non-owner		Consumer
Allowance for Loan Losses at June 30, 2020	Commercial		Program		Development		Mortgage		Multifamily		Occupied		Occupied		and Other		Unallocated		Total
Allowance for Loan Losses at March 31, 2021																					Commercial		Program		Development		Mortgage		Multifamily		Occupied		Occupied		and Other		Unallocated		Total
Individually Evaluated for Impairment	$	34	$	—	$	—	$	—	$	—	$	—	$	—	$	33	$	—	$	67	$	277	$	—	$	—	$	—	$	—	$	—	$	—	$	13	$	—	$	290
Collectively Evaluated for Impairment		5,158		90		2,173		3,322		6,697		964		8,323		141		698		27,566		6,174		83		2,773		3,894		9,856		1,187		11,026		219		485		35,697
Totals	$	5,192	$	90	$	2,173	$	3,322	$	6,697	$	964	$	8,323	$	174	$	698	$	27,633	$	6,451	$	83	$	2,773	$	3,894	$	9,856	$	1,187	$	11,026	$	232	$	485	$	35,987

Allowance for Loan Losses at December 31, 2019
Allowance for Loan Losses at December 31, 2020
Individually Evaluated for Impairment	$	31	$	—	$	—	$	—	$	—	$	—	$	—	$	14	$	—	$	45	$	37	$	—	$	—	$	—	$	—	$	—	$	—	$	13	$	—	$	50
Collectively Evaluated for Impairment		3,027		—		2,202		2,839		5,824		792		6,972		71		754		22,481		5,666		70		2,491		3,972		9,517		1,162		10,991		190		732		34,791
Totals	$	3,058	$	—	$	2,202	$	2,839	$	5,824	$	792	$	6,972	$	85	$	754	$	22,526	$	5,703	$	70	$	2,491	$	3,972	$	9,517	$	1,162	$	10,991	$	203	$	732	$	34,841


			Paycheck		Construction						CRE		CRE								Paycheck		Construction						CRE		CRE
			Protection		and Land		1--4 Family				Owner		Non-owner		Consumer						Protection		and Land		1--4 Family				Owner		Non-owner		Consumer
Loans at June 30, 2020	Commercial		Program		Development		Mortgage		Multifamily		Occupied		Occupied		and Other		Total
Loans at March 31, 2021																			Commercial		Program		Development		Mortgage		Multifamily		Occupied		Occupied		and Other		Total
Individually Evaluated for Impairment	$	254	$	—	$	164	$	1,229	$	—	$	1,840	$	220	$	33	$	3,740	$	1,273	$	—	$	146	$	1,356	$	—	$	870	$	3,081	$	13	$	6,739
Collectively Evaluated for Impairment		302,282		180,228		191,604		288,227		522,491		71,699		627,431		6,076		2,190,038		299,750		163,258		193,226		293,608		665,415		78,795		717,315		8,017		2,419,384
Totals	$	302,536	$	180,228	$	191,768	$	289,456	$	522,491	$	73,539	$	627,651	$	6,109	$	2,193,778	$	301,023	$	163,258	$	193,372	$	294,964	$	665,415	$	79,665	$	720,396	$	8,030	$	2,426,123

Loans at December 31, 2019
Loans at December 31, 2020
Individually Evaluated for Impairment	$	273	$	—	$	176	$	1,059	$	—	$	236	$	—	$	14	$	1,758	$	239	$	—	$	156	$	1,498	$	—	$	870	$	12,388	$	13	$	15,164
Collectively Evaluated for Impairment		275,762		—		196,600		259,552		515,014		66,348		592,545		4,459		1,910,280		303,981		138,454		170,061		292,981		626,465		74,734		696,912		7,676		2,311,264
Totals	$	276,035	$	—	$	196,776	$	260,611	$	515,014	$	66,584	$	592,545	$	4,473	$	1,912,038	$	304,220	$	138,454	$	170,217	$	294,479	$	626,465	$	75,604	$	709,300	$	7,689	$	2,326,428

1513

Table of Contents

The following table presents information regarding total carrying amounts and total unpaid principal balances of impaired loans by loan segment as of March 31, 2021 and December 31, 2020:


	March 31, 2021						December 31, 2020
	Recorded		Principal		Related		Recorded		Principal		Related
	Investment		Balance		Allowance		Investment		Balance		Allowance
Loans With No Related Allowance for Loan Losses:
Commercial	$	109	$	109	$	—	$	122	$	122	$	—
Construction and Land Development		146		753		—		156		763		—
Real Estate Mortgage:
HELOC and 1-4 Family Junior Mortgage		883		883		—		884		884		—
1st REM - Rentals		473		473		—		478		478		—
CRE Owner Occupied		870		870		—		870		870		—
CRE Non Owner Occupied		3,081		3,081		—		12,524		12,524		—
Totals		5,562		6,169		—		15,034		15,641		—

Loans With An Allowance for Loan Losses:
Commercial		1,164		1,167		277		117		120		37
Consumer and Other		13		13		13		13		13		13
Totals		1,177		1,180		290		130		133		50
Grand Totals	$	6,739	$	7,349	$	290	$	15,164	$	15,774	$	50

The following table presents information regarding the average balances and interest income recognized on impaired loans by loan segment for the three months ended March 31, 2021 and 2020:



	Three Months Ended March 31,
	2021				2020
	Average		Interest		Average		Interest
	Investment		Recognized		Investment		Recognized
Loans With No Related Allowance for Loan Losses:
Commercial	$	117	$	2	$	163	$	3
Construction and Land Development		150		—		175		—
Real Estate Mortgage:
HELOC and 1-4 Family Junior Mortgage		884		11		329		—
1st REM - Rentals		476		6		932		11
CRE Owner Occupied		871		3		1,837		25
CRE Non Owner Occupied		3,089		39		225		3
Totals		5,587		61		3,661		42

Loans With An Allowance for Loan Losses:
Commercial		1,159		12		111		—
Consumer and Other		13		—		14		—
Totals		1,172		12		125		—
Grand Totals	$	6,759	$	73	$	3,786	$	42

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

Table of Contents

~~The following table presents information regarding total carrying amounts and total unpaid principal balances of impaired loans by loan segment as of June 30, 2020 and December 31, 2019:~~

June 30, 2020

December 31, 2019

Recorded

Principal

Related

Recorded

Principal

Related


Investment

Balance

Allowance

Investment

Balance

Allowance
Loans With No Related Allowance for Loan Losses:

Commercial

$
145

$
145

$
—

$
167

$
167

$
—
Construction and Land Development

164

773

—

176

785

—
Real Estate Mortgage:






HELOC and 1-4 Family Junior Mortgage

305

492

—

302

489

—
1st REM - Rentals

924

924

—

757

757

—
CRE Owner Occupied

1,840

1,840

—

236

236

—
CRE Non Owner Occupied

220

220

—

—

—

—
Totals

3,598

4,394

—

1,638

2,434

—

Loans With An Allowance for Loan Losses:








Commercial

109

111

34

106

109

31
Consumer and Other

33

33

33

14

14

14
Totals

142

144

67

120

123

45
Grand Totals

$
3,740

$
4,538

$
67

$
1,758

$
2,557

$
45

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

Three Months Ended June 30,

Six Months Ended June 30,

2020

2019

2020

2019

Average

Interest

Average

Interest

Average

Interest

Average

Interest

Investment

Recognized

Investment

Recognized

Investment

Recognized

Investment

Recognized
Loans With No Related Allowance for Loan Losses:

Commercial

$
150

$
3

$
552

$
8

$
156

$
5

$
565

$
16
Construction and Land Development

168

—

2,796

87

172

—

2,899

87
Real Estate Mortgage:

HELOC and 1-4 Family Junior Mortgage

329

—

156

2

329

—

156

4
1st REM - 1-4 Family

—

—

617

12

—

—

617

12
1st REM - Rentals

926

11

635

9

929

22

1,451

18
CRE Owner Occupied

1,844

25

434

6

1,840

50

441

13
CRE Non Owner Occupied

222

3

—

—

224

6

—

—
Consumer and Other

—

—

54

—

—

—

55

—
Totals

3,639

42

5,244

124

3,650

83

6,184

150

Loans With An Allowance for Loan Losses:












Commercial

109

—

137

2

110

1

137

2
Real Estate Mortgage:

HELOC and 1-4 Family Junior Mortgage

—

—

305

—

—

—

306

—
1st REM - Rentals

—

—

—

—

—

—

191

—
Consumer and Other

34

1

—

—

34

1

—

—

143

1

442

2

144

2

634

2
Grand Totals

$
3,782

$
43

$
5,686

$
126

$
3,794

$
85

$
6,818

$
152

~~Table of Contents~~

The following tables present the risk category of loans by loan segment as of ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, based on the most recent analysis performed by management:


	June 30, 2020								March 31, 2021
	Pass		Watch		Substandard		Total		Pass		Watch		Substandard		Total
Commercial	$	280,767	$	21,515	$	254	$	302,536	$	271,737	$	28,013	$	1,273	$	301,023
Paycheck Protection Program		180,228		—		—		180,228		163,258		—		—		163,258
Construction and Land Development		191,472		132		164		191,768		193,226		—		146		193,372
Real Estate Mortgage:
HELOC and 1-4 Family Junior Mortgage		30,142		137		—		30,279		28,913		—		883		29,796
1st REM - 1-4 Family		39,235		123		174		39,532		44,705		699		—		45,404
LOCs and 2nd REM - Rentals		19,759		474		305		20,538		21,593		—		—		21,593
1st REM - Rentals		197,594		763		750		199,107		197,698		—		473		198,171
Multifamily		522,491		—		—		522,491		665,415		—		—		665,415
CRE Owner Occupied		70,881		818		1,840		73,539		78,795		—		870		79,665
CRE Non-owner Occupied		605,742		21,689		220		627,651		687,771		29,544		3,081		720,396
Consumer and Other		6,076		—		33		6,109		8,017		—		13		8,030
Totals	$	2,144,387	$	45,651	$	3,740	$	2,193,778	$	2,361,128	$	58,256	$	6,739	$	2,426,123


	December 31, 2019										December 31, 2020
	Pass			Watch			Substandard		Total		Pass			Watch			Substandard		Total
Commercial	$	275,741	$		21	$		273	$	276,035	$	289,465	$		14,516	$		239	$	304,220
Paycheck Protection Program												138,454			—			—		138,454
Construction and Land Development		196,462			138			176		196,776		170,061			—			156		170,217
Real Estate Mortgage:
HELOC and 1-4 Family Junior Mortgage		28,483			138			—		28,621		29,396			—			884		30,280
1st REM - 1-4 Family		36,370			124			177		36,671		41,239			703			—		41,942
LOCs and 2nd REM - Rentals		17,890			479			302		18,671		20,678			—			—		20,678
1st REM - Rentals		174,781			1,287			580		176,648		200,965			—			614		201,579
Multifamily		515,014			—			—		515,014		626,465			—			—		626,465
CRE Owner Occupied		65,411			—			1,173		66,584		74,734			—			870		75,604
CRE Non-owner Occupied		589,457			3,088			—		592,545		667,336			29,576			12,388		709,300
Consumer and Other		4,459			—			14		4,473		7,676			—			13		7,689
Totals	$	1,904,068		$	5,275		$	2,695	$	1,912,038	$	2,266,469		$	44,795		$	15,164	$	2,326,428

The following tables present the aging of the recorded investment in past due loans by loan segment as of March 31, 2021 and December 31, 2020:


	Accruing Interest
			30-89 Days		90 Days or
March 31, 2021	Current		Past Due		More Past Due		Nonaccrual		Total
Commercial	$	301,017	$	—	$	—	$	6	$	301,023
Paycheck Protection Program		163,258		—		—		—		163,258
Construction and Land Development		193,226		—		—		146		193,372
Real Estate Mortgage:
HELOC and 1-4 Family Junior Mortgage		29,796		—		—		—		29,796
1st REM - 1-4 Family		45,404		—		—		—		45,404
LOCs and 2nd REM - Rentals		21,593		—		—		—		21,593
1st REM - Rentals		198,171		—		—		—		198,171
Multifamily		665,415		—		—		—		665,415
CRE Owner Occupied		79,047		—		—		618		79,665
CRE Non-owner Occupied		720,396		—		—		—		720,396
Consumer and Other		8,030		—		—		—		8,030
Totals	$	2,425,353	$	—	$	—	$	770	$	2,426,123

1715

Table of Contents

~~The following tables present the aging of the recorded investment in past due loans by loan segment as of June 30, 2020 and December 31, 2019:~~

Accruing Interest

30-89 Days

90 Days or

June 30, 2020

Current

Past Due

More Past Due

Nonaccrual

Total
Commercial

$
302,508

$
21

$
—

$
7

$
302,536
Paycheck Protection Program

180,228

—

—

—

180,228
Construction and Land Development

191,604

—

—

164

191,768
Real Estate Mortgage:

HELOC and 1-4 Family Junior Mortgage

30,279

—

—

—

30,279
1st REM - 1-4 Family

39,532

—

—

—

39,532
LOCs and 2nd REM - Rentals

20,233

—

—

305

20,538
1st REM - Rentals

198,981

—

—

126

199,107
Multifamily

522,491

—

—

—

522,491
CRE Owner Occupied

73,407

132

—

—

73,539
CRE Non-owner Occupied

627,651

—

—

—

627,651
Consumer and Other

6,109

—

—

—

6,109
Totals

$
2,193,023

$
153

$
—

$
602

$
2,193,778


	Accruing Interest										Accruing Interest
			30-89 Days		90 Days or								30-89 Days		90 Days or
December 31, 2019	Current		Past Due		More Past Due		Nonaccrual		Total
December 31, 2020											Current		Past Due		More Past Due		Nonaccrual		Total
Commercial	$	276,028	$	—	$	—	$	7	$	276,035	$	304,211	$	3	$	—	$	6	$	304,220
Paycheck Protection Program												138,454		—		—		—		138,454
Construction and Land Development		196,600		—		—		176		196,776		170,061		—		—		156		170,217
Real Estate Mortgage:
HELOC and 1-4 Family Junior Mortgage		28,621		—		—		—		28,621		30,280		—		—		—		30,280
1st REM - 1-4 Family		36,671		—		—		—		36,671		41,942		—		—		—		41,942
LOCs and 2nd REM - Rentals		18,527		—		—		144		18,671		20,668		10		—		—		20,678
1st REM - Rentals		176,114		400		—		134		176,648		201,579		—		—		—		201,579
Multifamily		515,014		—		—		—		515,014		626,465		—		—		—		626,465
CRE Owner Occupied		66,584		—		—		—		66,584		74,991		—		—		613		75,604
CRE Non-owner Occupied		592,545		—		—		—		592,545		709,300		—		—		—		709,300
Consumer and Other		4,470		3		—		—		4,473		7,689		—		—		—		7,689
Totals	$	1,911,174	$	403	$	—	$	461	$	1,912,038	$	2,325,640	$	13	$	—	$	775	$	2,326,428

At ~~June 30, 2020,~~March 31, 2021, there were 43 loans classified as troubled debt restructurings with a current outstanding balance of ~~$830. At~~$408. In comparison, at December 31, ~~2019,~~2020, there were 3 loans classified as troubled debt restructurings with an outstanding balance of ~~$452.~~$421. There ~~was 1 new~~were 0 news loan classified as a troubled debt restructuring during the ~~six~~three month period ended ~~June 30, 2020~~March 31, 2021 and 0 loans classified as troubled debt restructurings during the previous twelve months subsequently defaulted during the ~~six~~three months ended ~~June 30, 2020.~~March 31, 2021.

In response to the COVID-19 pandemic, the Company has developed programs for clients who are experiencing business and personal disruptions due to the COVID-19 pandemic pursuant to which the Company may provide interest-only modifications, loan payment deferrals, or ~~interest-only~~extended amortization modifications. In accordance with interagency regulatory guidance and the CARES Act, qualifying loans modified in response to the COVID-19 pandemic will not be considered troubled debt restructurings.

The following table presents a summary of active loan modifications made in response to the COVID-19 pandemic, by loan segment and modification type, as of March 31, 2021:


	Interest-Only			Payment Deferral			Extended Amortization			Total
(dollars in thousands)	Amount		# of Loans	Amount		# of Loans	Amount		# of Loans	Amount		# of Loans
Commercial	$	3,547	7	$	—	—	$	4,802	1	$	8,349	8
Real Estate Mortgage:
CRE Owner Occupied		—	—		618	3		—	—		618	3
CRE Nonowner Occupied		28,116	8		—	—		—	—		28,116	8
Totals	$	31,663	15	$	618	3	$	4,802	1	$	37,083	19

Note 5: Deposits

The following table presents the composition of deposits at March 31, 2021 and December 31, 2020:


	March 31,		December 31,
	2021		2020
Transaction Deposits	$	1,146,343	$	1,038,193
Savings and Money Market Deposits		791,583		657,617
Time Deposits		344,581		353,543
Brokered Deposits		356,147		452,283
Totals	$	2,638,654	$	2,501,636

1816

Table of Contents

Note 6: Notes Payable

On February 25, 2021, the Company’s $11,000 note payable matured and was paid off in full.

On March 1, 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 revolving line of credit is for a maximum principal amount of $25,000 and matures on February 28, 2023. Interest accrues on unpaid principal balances at a variable interest rate equal to the greater of the Wall Street Journal Prime Rate in effect or a floor rate of 3.85%. The Company is required to pay quarterly payments of interest on the unpaid principal balance. Principal payments may be made any time prior to the maturity date, on which date all unpaid principal and accrued interest are due and payable. The note contains customary representations, warranties, and covenants, including certain financial covenants and capital ratio requirements. As of March 31, 2021, the Company believes it was in compliance with all covenants. As of March 31, 2021, there were 0 outstanding balances under the revolving line of credit.

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

Interest-Only

Payment Deferral

Total


Amount

# of Loans

Amount

# of Loans

Amount

# of Loans
Commercial

$
17,615

36

$
13,355

14

$
30,970

50
Construction and Land Development

133

1

—

—

133

1
Real Estate Mortgage:

1 - 4 Family Mortgage

8,037

22

420

2

8,457

24
Multifamily

41,320

6

16,251

3

57,571

9
CRE Owner Occupied

7,397

14

1,502

3

8,899

17
CRE Nonowner Occupied

100,805

41

86,175

18

186,980

59
Consumer and Other

—

—

—

—

—

—
Totals

$
175,307

120

$
117,703

40

$
293,010

160

~~Note 5: Premises and Equipment~~

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

Range of

June 30,

December 31,

Useful Lives

2020

2019
Land

N/A

$
5,174

$
5,174
Building

15 - 39 Years

3,486

3,487
Leasehold Improvements

3 ‑ 10 Years

3,344

3,344
Furniture and Equipment

3 ‑ 5 Years

5,184

3,902
Construction in Progress

N/A

31,157

16,693
Subtotal

48,345

32,600
Accumulated Depreciation

(5,283)

(4,972)
Totals

$
43,062

$
27,628

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

~~Note 6: Deposits~~

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

June 30,

December 31,

2020

2019
Transaction Deposits

$
934,255

$
712,136
Savings and Money Market Deposits

516,543

516,785
Time Deposits

382,187

360,027
Brokered Deposits

409,066

234,362
Totals

$
2,242,051

$
1,823,310

~~Table of Contents~~

Note 7: 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 counter party or client owes the Company, and results in credit risk to the Company. When the fair value of a derivative instrument contract is negative, the Company owes the client or counterparty and therefore, the Company has no credit risk.

The following table presents a summary of the Company’s interest rate swaps to facilitate customer transactions as of ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019:~~2020:


	June 30, 2020				December 31, 2019				March 31, 2021				December 31, 2020
	Notional		Estimated		Notional		Estimated		Notional		Estimated		Notional		Estimated
	Amount		Fair Value		Amount		Fair Value		Amount		Fair Value		Amount		Fair Value
Interest Rate Swap Agreements:
Assets	$	49,983	$	3,749	$	7,140	$	150	$	49,546	$	1,188	$	49,696	$	2,701
Liabilities		49,983		(3,749)		7,140		(150)		49,546		(1,188)		49,696		(2,701)
Total	$	99,966	$	—	$	14,280	$	—	$	99,092	$	—	$	99,392	$	—

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Cash Flow Hedging Derivatives

For derivative instruments that are designated and qualify as a cash flow hedge, the aggregate fair value of the derivative instrument is recorded in other assets or other liabilities with any gain or loss related to changes in fair value recorded in accumulated other comprehensive income, net of tax. The gain or loss is reclassified into earnings in the same period during which the hedged asset or liability affects earnings and is presented in the same income statement line item as the earnings effect of the hedged asset or liability. The Company utilizes cash flow hedges to manage interest rate exposure for the brokered certificate of deposit, wholesale borrowing, and notes payable portfolios. During the next 12 months, the Company estimates that ~~$796~~$1,118 will be reclassified to interest expense.

The following ~~tables present~~table presents a summary of the Company’s interest rate swaps designated as cash flow hedges as of ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019:~~2020:


	June 30, 2020			December 31, 2019			March 31, 2021			December 31, 2020
Notional Amount	$	107,000		$	48,000		$	115,000		$	111,000
Weighted Average Pay Rate		1.30	%		1.89	%		1.11	%		1.26	%
Weighted Average Receive Rate		1.05	%		2.25	%		0.19	%		0.22	%
Weighted Average Maturity (Years)		4.29			3.53			4.47			3.95
Net Unrealized Loss	$	(4,220)		$	(618)		$	(600)		$	(3,410)

During 2020, the Company purchased interest rate caps, designated as cash flow hedges, of certain deposit liabilities, with notional amounts totaling $50,000. The interest rate caps require receipt of variable amounts from the counterparties when interest rates rise above the strike price in the contracts. An initial premium of $2,689 was paid up front for the caps executed in 2020. Amortization on the interest rate caps was $26 and was recorded as a component of interest expense on brokered deposits for the three months ended March 31, 2021. The weighted average strike price for outstanding interest rate caps was 0.75% at March 31, 2021.

The following table presents a summary of the Company’s interest rate contracts as of March 31, 2021 and December 31, 2020:


	March 31, 2021				December 31, 2020
	Notional		Estimated		Notional		Estimated
	Amount		Fair Value		Amount		Fair Value
Interest Rate Swap Agreements:
Assets	$	50,000	$	1,388	$	5,000	$	56
Liabilities		65,000		(1,988)		106,000		(3,466)
Interest rate cap agreements:
Assets		50,000		5,890		50,000		2,834

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 March 31, 2021 and December 31, 2020, the Company pledged cash collateral for the Company’s derivative contracts of $2,128 and $8,526, respectively. In addition,

2018

Table of Contents

June 30, 2020

December 31, 2019

Notional

Estimated

Notional

Estimated

Amount

Fair Value

Amount

Fair Value
Interest Rate Swap Agreements:

Assets

$
—

$
—

$
18,000

$
134
Liabilities

107,000

(4,220)

30,000

(752)

as of March 31, 2021 and December 31, 2020, the Company's interest rate cap counterparties have pledged cash collateral to the Company of $6,370 and $2,700, respectively.

The following table presents the effect of derivative instruments in cash flow hedging relationships on the consolidated statements of income for the ~~six~~three months ended ~~June 30, 2020~~March 31, 2021 and ~~2019:~~2020:

Six Months Ended June 30,

Three Months Ended March 31,

(dollars in thousands)

2020

2019

(dollars in thousands)

2021

2020

Derivatives in

Location of Gain or

Gain (Loss)

Location of Loss

Loss

Cash Flow Hedging

(Loss) Reclassified

Reclassified from

Relationships

from AOCI into Income

AOCI into Earnings

AOCI into Income

AOCI into Earnings

Interest Rate Swaps

Interest Expense

(72)

—

Interest rate swaps

Interest expense

(262)

(18)

Interest rate caps

Interest expense

(66)

—

NaN amounts were reclassified from accumulated other comprehensive income into net income related to hedge ineffectiveness for these derivatives during the three ~~and six~~ months ended ~~June 30,~~March 31, 2021 and 2020, ~~and 2019,~~ and 0 amounts are expected to be reclassified from accumulated other comprehensive income into net income related to hedge ineffectiveness over the next twelve months.

~~Note 8: Subordinated Debentures~~

On June 19, 2020, the Company entered into a Subordinated Note Purchase Agreement with certain institutional accredited investors and qualified institutional buyers pursuant to which the Company sold and issued $50,000 in aggregate principal amount of 5.25% Fixed-to-Floating Rate Subordinated Notes due 2030 (the “2030 Notes”). The 2030 Notes were issued by the Company to the purchasers at a price equal to 100% of their face amount. Issuance costs were $1,127 and have been netted against subordinated debt on the consolidated balance sheets. These costs are being amortized over ~~five years, which represents the period from issuance to the first redemption date of July 1, 2025. There was 0 amortization expense relating to the 2030 Notes as of June 30, 2020.~~

The 2030 Notes mature on July 1, 2030, with a fixed rate of 5.25% payable semi-annually for five years until July 1, 2025. Thereafter, the interest rate converts to a variable interest rate equal to the three-month term Secured Overnight Financing Rate, or SOFR, plus 513 basis points quarterly in arrears until either the early redemption date or the maturity date. The Notes are not convertible into or exchangeable for any other securities or assets of the Company or any of its subsidiaries. The Notes are redeemable by the Company, in whole or in part, on or after July 1, 2025, and at any time upon the occurrence of certain events. Any redemption by the Company would be at a redemption price equal to 100% of the outstanding principal amount of the 2030 Notes being redeemed, including any accrued and unpaid interest thereon.

On July 12, 2017, the Company entered into a Subordinated Note Purchase Agreement with certain institutional accredited investors whereby the Company sold and issued $25,000 in aggregate principal amount of 5.875% Fixed-to-Floating Rate Subordinated Notes due 2027 (the “2027 Notes”). The 2027 Notes were issued by the Company to the purchasers at a price equal to 100% of their face amount. Issuance costs were $516 and have been netted against subordinated debt on the consolidated balance sheets. These costs are being amortized over five years, which represents the period from issuance to the first redemption date of July 15, 2022. Total amortization expense for the three months and six months ended June 30, 2020, was $26 and $52, respectively, with $215 remaining to be amortized as of June 30, 2020.

~~Table of Contents~~

The 2027 Notes mature on July 15, 2027, with a fixed interest rate of 5.875% payable semi-annually in arrears for five years until July 15, 2022. Thereafter, the Company will be obligated to pay interest at a rate equal to 3-month LIBOR plus 388 basis points quarterly in arrears until either the early redemption date or the maturity date. The 2027 Notes are not convertible into or exchangeable for any other securities or assets of the Company or any of its subsidiaries. The 2027 Notes are redeemable by the Company, in whole or in part, on or after July 15, 2022, and at any time upon the occurrence of certain events. Any redemption by the Company would be at a redemption price equal to 100% of the outstanding principal amount of the 2027 Notes being redeemed, including any accrued and unpaid interest thereon.

Note 9:8: Tax Credit Investments

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

The following table presents a summary of the Company’s investments in qualified affordable housing projects and other tax credit investments at ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019:~~2020:


		June 30, 2020				December 31, 2019					March 31, 2021				December 31, 2020
Investment	Accounting Method		Investment		Unfunded Commitment ⁽¹⁾		Investment		Unfunded Commitment	Accounting Method		Investment		Unfunded Commitment ⁽¹⁾		Investment		Unfunded Commitment
Low Income Housing Tax Credit (LIHTC)	Proportional Amortization	$	2,007	$	—	$	2,148	$	—	Proportional Amortization	$	1,797	$	—	$	1,867	$	—
Federal Historic Tax Credit (FHTC)	Equity		2,490		3,405		2,262		3,395	Equity		2,080		1,683		2,198		1,858
Total		$	4,497	$	3,405	$	4,410	$	3,395		$	3,877	$	1,683	$	4,065	$	1,858

(1)

All commitments are expected to be paid by the Company by ~~June 30,~~December 31, 2021.

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The following table presents a summary of the amortization expense and tax benefit recognized for the Company’s qualified affordable housing projects and other tax credit investments for the three ~~and six~~ months ended ~~June 30, 2020~~March 31, 2021 and ~~2019:~~2020:


	Three Months Ended				Six Months Ended				Three Months Ended
	June 30,				June 30,				March 31,
	2020		2019		2020		2019		2021		2020
Amortization Expense⁽¹⁾
LIHTC	$	70	$	72	$	141	$	144	$	70	$	71
FHTC		362		1,390		447		1,567		118		85
Total	$	432	$	1,462	$	588	$	1,711	$	188	$	156
Tax Benefit Recognized⁽²⁾
LIHTC	$	(82)	$	(83)	$	(165)	$	(165)	$	(83)	$	(83)
FHTC		(447)		(1,684)		(617)		(1,898)		(156)		(170)
Total	$	(529)	$	(1,767)	$	(782)	$	(2,063)	$	(239)	$	(253)

(1)

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

(2)

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

~~Table of Contents~~

Note ~~10:~~9: Commitments, Contingencies and Credit Risk

Financial Instruments with Off-Balance Sheet Credit Risk

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

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

The following commitments were outstanding at ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019:~~2020:


	June 30,		December 31,		March 31,		December 31,
	2020		2019		2021		2020
Unfunded Commitments Under Lines of Credit	$	492,373	$	500,962	$	745,605	$	644,338
Letters of Credit		82,677		79,225		94,912		90,206
Totals	$	575,050	$	580,187	$	840,517	$	734,544

The Company had outstanding letters of credit with the FHLB in total amounts of ~~$94,469~~$48,093 and ~~$108,502~~$60,091 at ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, respectively, on behalf of customers and to secure public deposits.

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

Legal Contingencies

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

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Note ~~11:~~10: Stock Options and Restricted Stock Awards

The Company established the Bridgewater Bancshares, Inc. 2012 Combined Incentive and Non-Statutory Stock Option Plan (the “2012 Plan”) under which the Company may grant options to its directors, officers, ~~employees,~~ and ~~consultants~~employees for up to 750,000 shares of common stock. Both incentive stock options and nonqualified stock options may be granted under the 2012 Plan. The exercise price of each option equals the fair market value of the Company’s stock on the date of grant and the maximum term of each outstanding option is ten years. All outstanding options have been granted with vesting periods of five years. As of ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, there were ~~0 remaining~~30,000 shares of the Company’s common stock reserved for future option grants under the 2012 Plan.

~~Table of Contents~~

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 ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, there were ~~310,600~~314,400 and 313,600 of remaining shares 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”). The types of awards which may be granted under the 2019 EIP include 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 ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, there were ~~780,688~~550,875 and ~~867,040~~561,883 of remaining shares of the Company’s common stock reserved for future grants under the 2019 EIP.

Stock Options

The fair value of each option award is estimated on the date of grant using a closed form option valuation (Black-Scholes) ~~model that uses the assumptions noted in the~~model. The following 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 termpresents a summary of the ~~option is based on the U.S. Treasury yield curve in effect at the time~~status of the ~~grant. Historically, the Company has not paid a dividend on its common stock and does not expect to do so in the near future.~~

The Company used the S&P 600 CM Bank Index as its historical volatility index. The S&P 600 CM Bank Index is an index of publicly traded small capitalization, regional, commercial banks located throughout the United States. There were 54 banks in the index ranging in market capitalization from $500 million up to $4.5 billion.

~~The weighted average assumptions used in the model for valuing~~Company’s stock option grants for the ~~six~~three months ended ~~June 30, 2020, are as follows:~~March 31, 2021:


	~~June 30,~~
	~~2020~~
~~Dividend Yield~~	—	%
~~Expected Life~~	7	~~Years~~
~~Expected Volatility~~	~~44.14~~	%
~~Risk-Free Interest Rate~~	~~0.68~~	%


	March 31, 2021
		Weighted
		Average
	Shares	Exercise Price
Outstanding at Beginning of Year	1,914,250	$	7.29
Granted	—		—
Exercised	(1,400)		8.24
Forfeitures	(800)		7.47
Outstanding at Period End	1,912,050	$	7.29

Options Exercisable at Period End	1,212,200	$	6.00

For the three months ended March 31, 2021 and 2020, the Company recognized compensation expense for stock options of $223 and $218, respectively.

2421

Table of Contents

The following table presents information pertaining to options outstanding at March 31, 2021:


		Options Outstanding				Options Exercisable
					Weighted Average
		Number of	Weighted Average		Remaining Contractual	Number of	Weighted Average
Range of Exercise Prices		Options	Exercise Price		Life in Years	Options	Exercise Price
$	2.13 - 3.99	522,750	$	2.94	2.7	522,750	$	2.94
	7.00 - 7.99	966,500		7.47	6.5	574,900		7.47
	8.00 - 8.99	25,000		8.76	9.0	—		—
	10.00 - 10.99	10,000		10.08	9.2	—		—
	11.00 - 11.99	85,000		11.27	8.1	24,000		11.33
	12.00 - 12.99	277,800		12.89	8.4	80,550		12.89
	13.00 - 13.99	25,000		13.22	7.1	10,000		13.22
	Totals	1,912,050	$	7.29	5.9	1,212,200	$	6.00

As of March 31, 2021, there was $1,802 of total unrecognized compensation cost related to nonvested stock options granted under the 2012 Plan, 2017 Plan and 2019 EIP that is expected to be recognized over a weighted-average period of 3.0 years.

The following table presents an analysis of nonvested options to purchase shares of the Company’s stock issued and outstanding for the three months ended March 31, 2021:


		Weighted
	Number of	Average Grant
	Shares	Date Fair Value
Nonvested Options at December 31, 2020	708,900	$	3.24
Granted	—		—
Vested	(8,250)		3.03
Forfeited	(800)		7.47
Nonvested Options at March 31, 2021	699,850	$	3.24

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 voting and forfeitable dividend rights.

The following table presents an analysis of nonvested restricted stock awards outstanding for the three months ended March 31, 2021:


		Weighted
	Number of	Average Grant
	Shares	Date Fair Value
Nonvested Awards at December 31, 2020	110,962	$	12.63
Granted	—		—
Vested	(986)		12.67
Forfeited	—		—
Nonvested Awards at March 31, 2021	109,976	$	12.63

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 March 31, 2021, and 2020, the Company recognized compensation expense for restricted stock awards of $112 and $108, respectively.

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As of March 31, 2021, there was $1,237 of total unrecognized compensation cost related to nonvested restricted stock awards granted under the 2019 EIP that is expected to be recognized over a period of four years.

In addition, during the three months ended March 31, 2021, the Company issued 5,008 shares of unrestricted common stock to directors as a part of their compensation for their annual services on the Company’s board of directors. The aggregate value of the shares issued to directors of $81 was included in stock based compensation expense in the accompanying consolidated statements of shareholders’ equity.

Restricted Stock Units

In 2020, the Company granted restricted stock units out of the 2019 EIP. Restricted stock units granted out of the 2019 EIP represent the right to receive 1 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. As of March 31, 2021, 6,000 restricted stock units were granted with a weighted average grant date fair value of $13.92.

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 March 31, 2021, the Company recognized compensation expense for restricted stock units of $158. NaN compensation expense was recognized for restricted stock units for the three months ended March 31, 2020.

As of March 31, 2021, there was $2,406 of total unrecognized compensation cost related to nonvested restricted stock units granted under the 2019 EIP that is expected to be recognized over a period of four years. As of March 31, 2021, 0 restricted stock units vested.

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.

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

June 30, 2020




Weighted

Average

Shares

Exercise Price
Outstanding at Beginning of Year

1,961,650

$
7.08
Granted

60,000

10.61
Exercised

(15,500)

2.55
Forfeitures

—

—
Outstanding at Period End

2,006,150

$
7.22

Options Exercisable at Period End

993,550

$
5.09

For the three months ended June 30, 2020 and 2019, the Company recognized compensation expense for stock options of $230 and $174, respectively. For the six months ended June 30, 2020 and 2019, the Company recognized compensation expense for stock options of $448 and $348, respectively.

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

Options Outstanding

Options Exercisable

Number

Remaining



Number
Exercise Price

Outstanding

Contractual Life

Exercise Price

Outstanding
$
2.13

66,750

2.8
Years

$
2.13

66,750

3.00

447,500

3.5
Years

3.00

447,500

3.58

45,000

4.5
Years

3.58

45,000

7.47

1,023,900

7.3
Years

7.47

402,300

13.22

25,000

7.9
Years

13.22

10,000

12.86

45,000

8.2
Years

12.86

9,000

12.94

30,000

8.3
Years

12.94

6,000

11.59

25,000

8.3
Years

11.59

5,000

11.15

10,000

8.7
Years

11.15

2,000

11.13

50,000

9.2
Years

11.13

—

12.92

178,000

9.4
Years

12.92

—

12.67

25,000

9.7
Years

12.67

—

8.76

25,000

9.8
Years

8.76

—

10.08

10,000

9.9
Years

10.08

—

Totals

2,006,150

6.6
Years

$
7.22

993,550

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

~~Table of Contents~~

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

Weighted

Number of

Average Grant

Shares

Date Fair Value
Nonvested Options at December 31, 2019

969,600

$
3.08
Granted

60,000

4.39
Vested

(17,000)

2.61
Forfeited

—

—
Nonvested Options at June 30, 2020

1,012,600

$
3.16

~~Restricted Stock Awards~~

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

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

Weighted

Number of

Average Grant

Shares

Date Fair Value
Nonvested Awards at December 31, 2019

132,960

$
12.92
Granted

11,141

10.32
Vested

—

—
Forfeited

—

—
Nonvested Awards at June 30, 2020

144,101

$
12.72

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

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

In addition, during the six months ended June 30, 2020, the Company issued 15,211 shares of common stock to directors as a part of their compensation for their annual services on the Company’s board of directors. The aggregate value of the shares issued to directors of $152 is included in stock based compensation expense in the accompanying consolidated statements of shareholders’ equity.

~~Table of Contents~~

~~Note 12: Regulatory Capital~~

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

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

~~The following tables present the Company and the Bank’s capital amounts and ratios~~ as of ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019:~~2020:


					Minimum Required				For Capital Adequacy				To be Well Capitalized								Minimum Required				For Capital Adequacy				To be Well Capitalized
					For Capital Adequacy				Purposes Plus Capital				Under Prompt Corrective								For Capital Adequacy				Purposes Plus Capital				Under Prompt Corrective
	Actual				Purposes				Conservation Buffer				Action Regulations				Actual				Purposes				Conservation Buffer				Action Regulations
June 30, 2020	Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio
March 31, 2021																	Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio

	(dollars in thousands)																(dollars in thousands)
Company (Consolidated):
Total Risk-Based Capital	$	351,627	15.99	%	$	175,889	8.00	%	$	230,854	10.50	%		N/A	N/A		$	372,720	14.46	%	$	206,221	8.00	%	$	270,665	10.50	%		N/A	N/A
Tier 1 Risk-Based Capital		250,480	11.39			131,917	6.00			186,882	8.50			N/A	N/A			266,621	10.34			154,666	6.00			219,110	8.50			N/A	N/A
Common Equity Tier 1 Capital		250,480	11.39			98,937	4.50			153,903	7.00			N/A	N/A			266,621	10.34			115,999	4.50			180,443	7.00			N/A	N/A
Tier 1 Leverage Ratio		250,480	9.94			100,750	4.00			100,750	4.00			N/A	N/A			266,621	9.11			117,121	4.00			117,121	4.00			N/A	N/A
Bank:
Total Risk-Based Capital	$	312,358	14.21	%	$	175,816	8.00	%	$	230,759	10.50	%	$	219,770	10.00	%	$	343,660	13.33	%	$	206,202	8.00	%	$	270,640	10.50	%	$	257,753	10.00	%
Tier 1 Risk-Based Capital		284,880	12.96			131,862	6.00			186,805	8.50			175,816	8.00			311,390	12.08			154,652	6.00			219,090	8.50			206,202	8.00
Common Equity Tier 1 Capital		284,880	12.96			98,897	4.50			153,839	7.00			142,851	6.50			311,390	12.08			115,989	4.50			180,427	7.00			167,539	6.50
Tier 1 Leverage Ratio		284,880	11.36			100,289	4.00			100,289	4.00			125,361	5.00			311,390	10.65			116,939	4.00			116,939	4.00			146,174	5.00

~~Table of Contents~~


					Minimum Required				For Capital Adequacy				To be Well Capitalized								Minimum Required				For Capital Adequacy				To be Well Capitalized
					For Capital Adequacy				Purposes Plus Capital				Under Prompt Corrective								For Capital Adequacy				Purposes Plus Capital				Under Prompt Corrective
	Actual				Purposes				Conservation Buffer				Action Regulations				Actual				Purposes				Conservation Buffer				Action Regulations
December 31, 2019	Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio
December 31, 2020																	Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio

	(dollars in thousands)																(dollars in thousands)
Company (Consolidated):
Total Risk-Based Capital	$	269,613	12.98	%	$	166,163	8.00	%	$	218,089	10.50	%		N/A	N/A		$	360,198	14.58	%	$	197,604	8.00	%	$	259,355	10.50	%		N/A	N/A
Tier 1 Risk-Based Capital		236,533	11.39			124,623	6.00			176,549	8.50			N/A	N/A			255,530	10.35			148,203	6.00			209,954	8.50			N/A	N/A
Common Equity Tier 1 Capital		236,533	11.39			93,467	4.50			145,393	7.00			N/A	N/A			255,530	10.35			111,152	4.50			172,904	7.00			N/A	N/A
Tier 1 Leverage Ratio		236,533	10.69			88,498	4.00			88,498	4.00			N/A	N/A			255,530	9.28			110,168	4.00			110,168	4.00			N/A	N/A
Bank:
Total Risk-Based Capital	$	252,501	12.16	%	$	166,137	8.00	%	$	218,055	10.50	%	$	207,671	10.00	%	$	330,380	13.37	%	$	197,629	8.00	%	$	259,388	10.50	%	$	247,036	10.00	%
Tier 1 Risk-Based Capital		243,461	11.72			124,603	6.00			176,521	8.50			166,137	8.00			299,447	12.12			148,222	6.00			209,981	8.50			197,629	8.00
Common Equity Tier 1 Capital		243,461	11.72			93,452	4.50			145,370	7.00			134,986	6.50			299,447	12.12			111,166	4.50			172,925	7.00			160,574	6.50
Tier 1 Leverage Ratio		243,461	11.01			88,455	4.00			88,455	4.00			110,569	5.00			299,447	10.89			109,972	4.00			109,972	4.00			137,465	5.00

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

Note ~~13: Stock Repurchase Program~~

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

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

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

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

~~Note 14:~~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

~~Table of Contents~~

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

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

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

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

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

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

Recurring Basis

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The following tables present the balances of the assets and liabilities measured at fair value on a recurring basis as of ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019:~~2020:


	June 30, 2020								March 31, 2021
	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									$	1,011	$		$	—	$	1,011
Municipal Bonds	$	—	$	100,722	$	—	$	100,722		—		122,122		—		122,122
Mortgage-Backed Securities		—		94,624		—		94,624		—		123,266		—		123,266
Corporate Securities		—		55,630		—		55,630		—		74,071		—		74,071
SBA Securities		—		44,054		—		44,054		—		38,051		—		38,051
Asset-Backed Securities		—		31,265		—		31,265		—		38,805		—		38,805
Interest Rate Caps										—		5,890		—		5,890
Interest Rate Swaps		—		3,749		—		3,749		—		2,576		—		2,576
Total Fair Value of Financial Assets	$	—	$	330,044	$	—	$	330,044	$	1,011	$	404,781	$	—	$	405,792
Fair Value of Financial Liabilities:
Interest Rate Swaps	$	—	$	7,969	$	—	$	7,969	$	—	$	3,176	$	—	$	3,176
Total Fair Value of Financial Liabilities	$	—	$	7,969	$	—	$	7,969	$	—	$	3,176	$	—	$	3,176

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December 31, 2019


Level 1

Level 2

Level 3

Total
Fair Value of Financial Assets:

Securities Available for Sale:

U.S. Treasury Securities

$
4,998

$
—

$
—

$
4,998
Municipal Bonds

—

105,743

—

105,743
Mortgage-Backed Securities

—

64,728

—

64,728
Corporate Securities

—

50,176

—

50,176
SBA Securities

—

49,559

—

49,559
Asset-Backed Securities

—

14,673

—

14,673
Interest Rate Swaps

—

284

—

284
Total Fair Value of Financial Assets

$
4,998

$
285,163

$
—

$
290,161
Fair Value of Financial Liabilities:

Interest Rate Swaps

$
—

$
902

$
—

$
902
Total Fair Value of Financial Liabilities

$
—

$
902

$
—

$
902


	December 31, 2020
	Level 1		Level 2		Level 3		Total
Fair Value of Financial Assets:
Securities Available for Sale:
Municipal Bonds	$	—	$	115,012	$	—	$	115,012
Mortgage-Backed Securities		—		124,260		—		124,260
Corporate Securities		—		72,155		—		72,155
SBA Securities		—		40,107		—		40,107
Asset-Backed Securities		—		39,095		—		39,095
Interest Rate Caps		—		2,834		—		2,834
Interest Rate Swaps		—		2,757		—		2,757
Total Fair Value of Financial Assets	$	—	$	396,220	$	—	$	396,220
Fair Value of Financial Liabilities:
Interest Rate Swaps	$	—	$	6,167	$	—	$	6,167
Total Fair Value of Financial Liabilities	$	—	$	6,167	$	—	$	6,167

Investment Securities

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

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

Interest Rate Caps

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

Interest Rate Swaps

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

Nonrecurring Basis

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

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The following tables present net impairment losses related to nonrecurring fair value measurements of certain assets at ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019:~~2020:


	June 30, 2020								March 31, 2021
	Level 1		Level 2		Level 3		Loss		Level 1		Level 2		Level 3		Loss
Impaired Loans	$	—	$	75	$	—	$	67	$	—	$	887	$	—	$	290
Totals	$	—	$	75	$	—	$	67	$	—	$	887	$	—	$	290


	December 31, 2019								December 31, 2020
	Level 1		Level 2		Level 3		Loss		Level 1		Level 2		Level 3		Loss
Impaired Loans	$	—	$	75	$	—	$	206	$	—	$	80	$	—	$	50
Totals	$	—	$	75	$	—	$	206	$	—	$	80	$	—	$	50

Impaired Loans

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

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

Fair Value

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

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

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The following tables present the carrying amount and estimated fair values of financial instruments at ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019:~~2020:


	June 30, 2020										March 31, 2021
			Fair Value Hierarchy										Fair Value Hierarchy
	Carrying								Estimated		Carrying								Estimated
	Amount		Level 1		Level 2		Level 3		Fair Value		Amount		Level 1		Level 2		Level 3		Fair Value
Financial Assets:
Cash and Due From Banks	$	178,428	$	178,428	$	—	$	—	$	178,428	$	200,896	$	200,896	$	—	$	—	$	200,896
Bank-Owned Certificates of Deposit		2,895		—		2,967		—		2,967		2,369		—		2,405		—		2,405
Securities Available for Sale		326,295		—		326,295		—		326,295		397,326		—		397,326		—		397,326
FHLB Stock, at Cost		8,617		—		8,617		—		8,617		5,820		—		5,820		—		5,820
Loans, Net		2,155,858		—		2,195,310				2,195,310		2,378,863		—		2,370,337		—		2,370,337
Accrued Interest Receivable		8,267		—		8,267		—		8,267		8,718		—		8,718		—		8,718
Interest Rate Caps												5,890		—		5,890		—		5,890
Interest Rate Swaps		3,749		—		3,749		—		3,749		2,576		—		2,576		—		2,576

Financial Liabilities:
Deposits	$	2,242,051	$	—	$	2,254,352	$	—	$	2,254,352	$	2,638,654	$	—	$	2,604,786	$	—	$	2,604,786
Notes Payable		12,000		—		12,001		—		12,001
FHLB Advances		147,500		—		154,519		—		154,519		57,500		—		58,629		—		58,629
Subordinated Debentures		73,658		—		74,840		—		74,840		73,826		—		76,258		—		76,258
Accrued Interest Payable		1,953		—		1,953		—		1,953		1,736		—		1,736		—		1,736
Interest Rate Swaps		7,969		—		7,969		—		7,969		3,176		—		3,176		—		3,176


	December 31, 2019										December 31, 2020
			Fair Value Hierarchy										Fair Value Hierarchy
	Carrying								Estimated		Carrying								Estimated
	Amount		Level 1		Level 2		Level 3		Fair Value		Amount		Level 1		Level 2		Level 3		Fair Value
Financial Assets:
Cash and Due From Banks	$	31,935	$	31,935	$	—	$	—	$	31,935	$	160,675	$	160,675	$	—	$	—	$	160,675
Bank-Owned Certificates of Deposit		2,654		—		2,677		—		2,677		2,860		—		2,908		—		2,908
Securities Available for Sale		289,877		4,998		284,879		—		289,877		390,629		—		390,629		—		390,629
FHLB Stock, at Cost		7,824		—		7,824		—		7,824		5,027		—		5,027		—		5,027
Loans, Net		1,884,000		—		1,891,987		—		1,891,987		2,282,436		—		2,309,421		—		2,309,421
Accrued Interest Receivable		6,775		—		6,775		—		6,775		9,172		—		9,172		—		9,172
Interest Rate Caps												2,834		—		2,834		—		2,834
Interest Rate Swaps		284		—		284		—		284		2,757		—		2,757		—		2,757

Financial Liabilities:
Deposits	$	1,823,310	$	—	$	1,821,915	$	—	$	1,821,915	$	2,501,636	$	—	$	2,509,148	$	—	$	2,509,148
Notes Payable		13,000		—		13,022		—		13,022		11,000		—		11,001		—		11,001
FHLB Advances		136,500		—		141,152		—		141,152		57,500		—		58,830		—		58,830
Subordinated Debentures		24,733		—		25,309		—		25,309		73,739		—		74,769		—		74,769
Accrued Interest Payable		1,982		—		1,982		—		1,982		1,615		—		1,615		—		1,615
Interest Rate Swaps		902		—		902		—		902		6,167		—		6,167		—		6,167

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

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

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

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

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

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

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

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

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

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

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

Off-balance sheet instruments – Fair values of the Company’s off-balance sheet instruments (lending commitments and unused lines of credit) are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements, the counterparties’ credit standing and discounted cash flow analysis. The fair value of these off-balance-sheet items approximates the recorded amounts of the related fees and was not material at ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019.~~2020.

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

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

General

The following discussion explains the Company’s financial condition and results of operations as of and for the three ~~and six~~ months ended ~~June 30, 2020.~~March 31, 2021. Annualized results for ~~these~~this interim ~~periods~~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, ~~2019,~~2020, filed with the Securities and Exchange Commission, or the SEC, on March ~~12, 2020.~~11, 2021.

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

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loan concentrations in our loan portfolio;

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

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

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

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the ability to successfully manage credit risk;

●

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

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

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the concentration of large loans to certain borrowers;

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the ability to successfully manage liquidity risk;

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

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the concentration of large deposits from certain clients;

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

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

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

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

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

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

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competition in the financial services industry;

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

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

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the effectiveness of ~~our~~the risk management ~~framework;~~framework;

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

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the extensive regulatory framework that applies to us;

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the impact of recent and future legislative and regulatory changes;

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interest rate risk;

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

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the negative effects of the COVID-19 pandemic, including its effects on the economic environment, our clients and our operations, as well as any changes into federal, ~~tax law~~state or ~~policy;~~

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~~the imposition of tariffs~~local government laws, regulations or ~~other governmental policies impacting the value of products produced by our commercial borrowers;~~

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

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~~any other risks described in the “Risk Factors” section of this report~~changes to U.S. tax laws, regulations and in the Company’s Annual Report on Form 10-K as of December 31, 2019, filed with the SEC on March 12, 2020, as well as those set forth in this report and other reports filed by the Company with the SEC.guidance

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

Overview

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

Information Regarding COVID-19 Impact

Financial Position and Results of Operations. The ~~outbreak of the~~ novel coronavirus, or COVID-19, ~~which was declared a~~ pandemic ~~by the World Health Organization on March 11, 2020,~~ has continued to create uncertainty and extraordinary change for the Company, its clients, its communities and the country as a whole. ~~In response to this pandemic,~~Vaccines have been rolled out nationwide in the ~~Company rapidly deployed its business continuity plan and continues to take steps to protect the health and safety~~first quarter of ~~its employees and clients. Given the fluidity of~~2021, however the situation remains fluid and management cannot estimate the duration and full impact of the COVID-19 pandemic on the economy, financial markets and the Company’s financial condition and results of operations. ~~At this point, management does not expect that the Company’s financial results in future quarters will track with the Company’s historical performance.~~

Effects on the Company’s Market Area. The Company’s primary banking market area is the Minneapolis-St. Paul-Bloomington, MN-WI Metropolitan Statistical Area. ~~In Minnesota,~~Throughout the COVID-19 pandemic, Minnesota’s Governor issued ~~an order on March 25,~~

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~~2020 that, subject~~restrictions impacting business and gatherings within the state. The Company’s branch operations continue to ~~limited exceptions, required individuals~~operate in compliance with fluid statewide mandates, maintaining the safety of employees and clients as the utmost priority, all while attempting to stay at home and non-essential businesses to cease all activities, other than minimum basic operations. This order was lifted as of May 18, 2020, and the state has entered a phased-in approach to reopening, where businesses must operate under certain restrictions based on the nature and industry of the business. As a result of the order and restrictions, Minnesota has experienced a dramatic and sudden increase in unemployment levels, significant stress on personal and business income, and recessionary economic conditions. Recent increases in COVID-19 infections across the nation have created uncertainty surrounding the future recovery of many companies’ operations and the local economy. Fortunately, to date Minnesota has been less impacted by the virus than other states in terms of cases and deaths.ensure clients’ diverse banking needs are met.

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

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

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

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

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

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

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

Capital and Liquidity. At ~~June 30, 2020,~~March 31, 2021, the Company and Bank’s capital ratios were in excess of all regulatory requirements. The Company maintains access to multiple sources of ~~liquidity. The Company has taken additional action to ensure the strength of its~~ liquidity, ~~position by establishing borrowing capacity through the Federal Reserve lending facility in connection with funding PPP loans.~~

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

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

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

COVID-19 Related Loan Deferrals and PPP Lending. The Company has developed programs for ~~assisting existing~~ clients ~~through this uncertain time~~who are experiencing business and personal disruptions due to the COVID-19 pandemic by providing ~~when appropriate, loan~~interest-only modifications, ~~that may include~~ loan payment deferrals, ~~or interest-only~~and extended amortization modifications. As of June 30, 2020, the Company had closed loan modifications for 160 loans totaling $293.0 million. Of that total, loan modifications to interest-only payments totaled $175.3 million and loans with payment deferrals totaled $117.7 million. In accordance with ~~recent~~ regulatory guidance and the CARES Act, qualifying loans modified in response to the COVID-19 pandemic will not be considered TDRs. There was no new modification activity in the first quarter of 2021. The Company had 19 modified loans totaling $37.1 million outstanding as of March 31, 2021, representing 1.6% of the total loan portfolio, excluding PPP loans.

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In a further effort to assist both existing and new clients, the Company participated in ~~government loan programs through~~both the ~~SBA, primarily~~first and second rounds of the ~~PPP.~~SBA’s PPP, which stemmed from the CARES Act that was signed into law on March 27, 2020, and reopened as authorized by the Economic Aid to Hard-Hit Small Businesses, Non-Profits, and Venues Act, or Economic Aid Act, which was signed into law on December 27, 2020. As of ~~June 30, 2020,~~March 31, 2021, $93.1 million of round one PPP loans and $70.1 million of round two PPP loans remained outstanding for total outstanding PPP principal balances ~~originated~~of $163.3 million. The Company recognized $1.5 million of net origination fees associated with the program during the ~~quarter totaled $180.2 million and resulted in fees from the SBA, net of costs, of $5.7 million, $528,000 of which was recognized in the second quarter of 2020.~~three months ended March 31, 2021.

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

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~~the protocols for employees as they return to~~Employees in the office ~~which is currently scheduled for mid-August.~~work in accordance with health and safety procedures, including increasing physical space between employees, using face coverings, and requiring employees with COVID-19 symptoms or exposure to quarantine away from the office. Additional ~~details~~information about the Company’s COVID-19 pandemic assistance programs, including relevant disclosures and up-to-date information, ~~are~~is maintained at bwbmn.com.

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

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

Critical Accounting Policies and Estimates

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

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Allowance for Loan Losses

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

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

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expedient, at the loan’s observable market price, or the fair value of the underlying collateral, reduced by costs to sell on a discounted basis, is used if a loan is collateral dependent.

Investment Securities Impairment

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

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

Fair Value of Financial Instruments

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

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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

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

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Operating Results Overview

The following table summarizes certain key financial results 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,			March 31,			December 31,			September 30,			June 30,			March 31,
	2020			2020			2019			2019			2019			2021			2020			2020			2020			2020
Per Common Share Data
Basic Earnings Per Share	$	0.26		$	0.26		$	0.30		$	0.27		$	0.27		$	0.38		$	0.18		$	0.25		$	0.26		$	0.26
Diluted Earnings Per Share		0.26			0.25			0.29			0.27			0.26			0.37			0.17			0.25			0.26			0.25
Book Value Per Share		8.92			8.61			8.45			8.20			7.90			9.92			9.43			9.25			8.92			8.61
Tangible Book Value Per Share ⁽¹⁾		8.80			8.49			8.33			8.08			7.78			9.80			9.31			9.13			8.80			8.49
Basic Weighted Average Shares Outstanding		28,676,441			28,791,494			28,833,576			28,820,144			29,703,024			28,017,366			28,179,768			28,683,855			28,676,441			28,791,494
Diluted Weighted Average Shares Outstanding		29,165,157			29,502,245			29,561,103			29,497,961			30,312,039			28,945,212			28,823,384			29,174,601			29,165,157			29,502,245
Shares Outstanding at Period End		28,837,560			28,807,375			28,973,572			28,781,162			28,986,729			28,132,929			28,143,493			28,710,775			28,837,560			28,807,375

Selected Performance Ratios
Return on Average Assets (Annualized)		1.17	%		1.29	%		1.53	%		1.43	%		1.55	%		1.47	%		0.70	%		1.05	%		1.17	%		1.29	%
Pre-Provision Net Revenue Return on Average Assets (Annualized)⁽¹⁾		2.00			2.11			2.09			2.08			2.08			2.15			2.30			1.94			2.00			2.11
Return on Average Common Equity (Annualized)		11.98			11.94			14.16			13.31			13.88			15.87			7.45			10.84			11.98			11.94
Return on Average Tangible Common Equity (Annualized)⁽¹⁾		12.14			12.10			14.37			13.52			14.10			16.06			7.55			10.98			12.14			12.10
Average Equity to Average Assets ⁽¹⁾																	9.28			9.44			9.71			9.73			10.82
Yield on Interest Earning Assets		4.45			4.90			5.01			4.98			5.05			4.31			4.46			4.30			4.45			4.90
Yield on Total Loans, Gross		4.85			5.17			5.33			5.32			5.33			4.74			4.89			4.73			4.85			5.17
Cost of Interest Bearing Liabilities		1.58			1.84			1.96			2.04			2.07			1.04			1.24			1.50			1.58			1.84
Cost of Total Deposits		0.99			1.27			1.34			1.42			1.46			0.59			0.69			0.87			0.99			1.27
Net Interest Margin ⁽²⁾		3.38			3.59			3.65			3.56			3.60			3.60			3.61			3.28			3.38			3.59
Efficiency Ratio⁽¹⁾		48.6			44.4			49.6			45.6			50.1			41.2			59.0			42.3			48.6			44.4
Adjusted Efficiency Ratio⁽¹⁾		40.4			44.1			44.3			42.9			42.7			40.7			36.6			41.7			40.4			44.1
Noninterest Expense to Average Assets (Annualized)		1.64			1.69			1.87			1.66			1.84			1.51			2.16			1.42			1.64			1.69
Adjusted Noninterest Expense to Average Assets (Annualized) ⁽¹⁾		1.37			1.68			1.67			1.56			1.57			1.49			1.34			1.40			1.37			1.68
Loan to Deposit Ratio		97.8			105.4			104.9			102.4			105.0			91.9			93.0			99.4			97.8			105.4
Core Deposits to Total Deposits		75.7			78.6			80.7			79.9			78.3			83.5			78.1			77.1			75.7			78.6
Tangible Common Equity to Tangible Assets ⁽¹⁾		9.23			10.13			10.65			10.43			10.64			8.99			8.96			9.46			9.23			10.13

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

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

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

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

4135

Table of Contents

Selected Financial Data

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


	June 30,		March 31,		December 31,		September 30,		June 30,		March 31,		December 31,		September 30,		June 30,		March 31,
(dollars in thousands)	2020		2020		2019		2019		2019		2021		2020		2020		2020		2020
Selected Balance Sheet Data
Total Assets	$	2,754,463	$	2,418,730	$	2,268,830	$	2,232,339	$	2,123,631	$	3,072,359	$	2,927,345	$	2,774,564	$	2,754,463	$	2,418,730
Total Loans, Gross		2,193,778		2,002,817		1,912,038		1,846,218		1,784,903		2,426,123		2,326,428		2,259,228		2,193,778		2,002,817
Allowance for Loan Losses		27,633		24,585		22,526		22,124		21,362		35,987		34,841		31,381		27,633		24,585
Goodwill and Other Intangibles		3,391		3,439		3,487		3,535		3,582		3,248		3,296		3,344		3,391		3,439

Deposits		2,242,051		1,900,127		1,823,310		1,802,236		1,699,265		2,638,654		2,501,636		2,273,044		2,242,051		1,900,127
Tangible Common Equity⁽¹⁾		253,799		244,704		241,307		232,524		225,555		275,923		262,109		262,088		253,799		244,704
Total Shareholders' Equity		257,190		248,143		244,794		236,059		229,137		279,171		265,405		265,432		257,190		248,143
Average Total Assets - Quarter-to-Date		2,622,272		2,317,040		2,221,370		2,168,909		2,069,707		2,940,262		2,816,032		2,711,755		2,622,272		2,317,040
Average Common Equity - Quarter-to-Date		255,109		250,800		240,188		232,590		231,374		272,729		265,716		263,195		255,109		250,800

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

For the Three Months Ended

June 30,

March 31,

December 31,

September 30,

June 30,
(dollars in thousands)

2020

2020

2019

2019

2019
Selected Income Statement Data

Interest Income

$
28,166

$
27,468

$
27,419

$
26,572

$
25,520
Interest Expense

6,824

7,366

7,491

7,637

7,382
Net Interest Income

21,342

20,102

19,928

18,935

18,138
Provision for Loan Losses

3,000

2,100

600

900

600
Net Interest Income after Provision for Loan Losses

18,342

18,002

19,328

18,035

17,538
Noninterest Income

1,977

1,719

1,112

946

1,134
Noninterest Expense

10,711

9,746

10,489

9,084

9,474
Income Before Income Taxes

9,608

9,975

9,951

9,897

9,198
Provision for Income Taxes

2,010

2,532

1,380

2,092

1,189
Net Income

$
7,598

$
7,443

$
8,571

$
7,805

$
8,009

~~Table of Contents~~

~~Discussion and Analysis of Results of Operations~~

~~Net Income~~

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

For the Three Months Ended

March 31,

December 31,

September 30,

June 30,

March 31,

(dollars in thousands)

2021

2020

Selected Income Statement Data

Interest Income

30,440

30,699

28,493

28,166

27,468

Interest Expense

5,045

5,858

6,814

6,824

7,366

Net Interest Income

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

4325,395

~~Table of Contents~~

~~Average Balances and Yields~~

~~The following tables present,~~24,841

21,679

21,342

20,102

Provision for the three and six months ended June 30, 2020 and 2019, the average balances of each principal category of assets, liabilities and shareholders’ equity, and an analysis of net interest income. The average balances are principally daily averages and,Loan Losses

1,100

3,900

3,750

3,000

2,100

Net Interest Income after Provision for ~~loans, include both performing and nonperforming balances. Interest income on loans includes the effects of net deferred loan origination fees and costs accounted~~Loan Losses

24,295

20,941

17,929

18,342

18,002

Noninterest Income

1,008

986

1,157

1,977

1,719

Noninterest Expense

10,923

15,258

9,672

10,711

9,746

Income Before Income Taxes

14,380

6,669

9,414

9,608

9,975

Provision for ~~as yield adjustments. These tables are presented on a tax-equivalent basis, if applicable.~~Income Taxes

For the Three Months Ended

June 30, 2020

June 30, 2019

Average

Interest

Yield/

Average

Interest

Yield/


Balance

& Fees

Rate

Balance

& Fees

Rate

(dollars in thousands)

Interest Earning Assets:

Cash Investments

$
109,073

$
37

0.14
%
$
38,142

$
171

1.80
%
Investment Securities:

Taxable Investment Securities

203,559

1,304

2.58

140,890

1,058

3.01

Tax-Exempt Investment Securities⁽¹⁾

91,793

996

4.37

103,223

1,103

4.28

Total Investment Securities

295,352

2,300

3.13

244,113

2,161

3.55

Paycheck Protection Program Loans ⁽²⁾

139,235

873

2.52

—

—

—

Loans ⁽¹⁾⁽²⁾

2,013,163

25,070

5.01

1,755,686

23,321

5.33

Total Loans

2,152,398

25,943

4.85

1,755,686

23,321

5.33

Federal Home Loan Bank Stock

10,469

125

4.81

7,694

100

5.23

Total Interest Earning Assets

2,567,292

28,405

4.45
%

2,045,635

25,753

5.05
%
Noninterest Earning Assets

54,980

24,072

Total Assets

$
2,622,272

$
2,069,707

Interest Bearing Liabilities:

Deposits:

Interest Bearing Transaction Deposits

272,565

377

0.56
%

202,886

387

0.77
%
Savings and Money Market Deposits

521,313

1,327

1.02

431,716

1,938

1.80

Time Deposits

388,357

2,122

2.20

354,026

2,120

2.40

Brokered Deposits

319,711

1,344

1.69

266,804

1,575

2.37

Total Interest Bearing Deposits

1,501,946

5,170

1.38

1,255,432

6,020

1.92

Federal Funds Purchased

9

—

0.72

2,089

12

2.24

Notes Payable

12,000

111

3.72

14,000

130

3.72

FHLB Advances

193,819

1,064

2.21

131,385

827

2.52

Subordinated Debentures

31,228

479

6.17

24,673

393

6.39

Total Interest Bearing Liabilities

1,739,002

6,824

1.58
%

1,427,579

7,382

2.07
%
Noninterest Bearing Liabilities:

Noninterest Bearing Transaction Deposits

603,456

401,480

Other Noninterest Bearing Liabilities

24,705

9,274

Total Noninterest Bearing Liabilities

628,161

410,754

Shareholders' Equity

255,109

231,374

Total Liabilities and Shareholders' Equity

$
2,622,272

$
2,069,707

Net Interest Income / Interest Rate Spread

21,581

2.87
%

18,371

2.98
%
Net Interest Margin ⁽³⁾

3.38
%

3.60
%
Taxable Equivalent Adjustment:

Tax-Exempt Investment Securities

(239)

(233)

Net Interest Income

$
21,342

$
18,138

3,709

1,690

2,240

2,010

2,532

Net Income

10,671

4,979

7,174

7,598

7,443

Table of Contents

Discussion and Analysis of Results of Operations

Net Income

Net income was $10.7 million for the first quarter of 2021, a 43.4% increase compared to net income of $7.4 million for the first quarter of 2020. Net income per diluted common share for the first quarter of 2021 was $0.37, a 46.1% increase compared to $0.25 per diluted common share for the first quarter of 2020.

Net Interest Income

Table of Contents

Average Balances and Yields

The following table presents, for the three months ended March 31, 2021 and 2020, the average balances of each principal category of assets, liabilities and shareholders’ equity, and an analysis of net interest income. The average balances are principally daily averages and, for loans, include both performing and nonperforming balances. Interest income on loans includes the effects of net deferred loan origination fees and costs accounted for as yield adjustments. These tables are presented on a tax-equivalent basis, if applicable.


	For the Three Months Ended
	March 31, 2021						March 31, 2020
	Average		Interest		Yield/		Average		Interest		Yield/
	Balance		& Fees		Rate		Balance		& Fees		Rate
(dollars in thousands)
Interest Earning Assets:
Cash Investments	$	105,477	$	34	0.13	%	$	29,462	$	59	0.81	%
Investment Securities:
Taxable Investment Securities		301,680		1,723	2.32			188,186		1,387	2.96
Tax-Exempt Investment Securities⁽¹⁾		80,963		881	4.41			94,728		1,024	4.35
Total Investment Securities		382,643		2,604	2.76			282,914		2,411	3.43
Paycheck Protection Program Loans ⁽²⁾		148,881		1,864	5.08			—		—	—
Loans ⁽¹⁾⁽²⁾		2,241,038		26,074	4.72			1,954,959		25,150	5.17
Total Loans		2,389,919		27,938	4.74			1,954,959		25,150	5.17
Federal Home Loan Bank Stock		5,045		78	6.28			10,270		100	3.93
Total Interest Earning Assets		2,883,084		30,654	4.31	%		2,277,605		27,720	4.90	%
Noninterest Earning Assets		57,178						39,435
Total Assets	$	2,940,262					$	2,317,040
Interest Bearing Liabilities:
Deposits:
Interest Bearing Transaction Deposits	$	364,017		422	0.47	%	$	246,843		431	0.70	%
Savings and Money Market Deposits		724,104		1,008	0.56			533,578		1,905	1.44
Time Deposits		344,715		1,267	1.49			376,154		2,177	2.33
Brokered Deposits		402,694		974	0.98			218,289		1,211	2.23
Total Interest Bearing Deposits		1,835,530		3,671	0.81			1,374,864		5,724	1.67
Federal Funds Purchased		—		—	—			24,835		107	1.74
Notes Payable		6,722		61	3.66			12,505		115	3.70
FHLB Advances		57,500		228	1.61			172,379		1,027	2.40
Subordinated Debentures		73,776		1,085	5.96			24,744		393	6.39
Total Interest Bearing Liabilities		1,973,528		5,045	1.04	%		1,609,327		7,366	1.84	%
Noninterest Bearing Liabilities:
Noninterest Bearing Transaction Deposits		676,173						444,201
Other Noninterest Bearing Liabilities		17,832						12,712
Total Noninterest Bearing Liabilities		694,005						456,913
Shareholders' Equity		272,729						250,800
Total Liabilities and Shareholders' Equity	$	2,940,262					$	2,317,040
Net Interest Income / Interest Rate Spread				25,609	3.27	%				20,354	3.06	%
Net Interest Margin ⁽³⁾					3.60	%					3.59	%
Taxable Equivalent Adjustment:
Tax-Exempt Investment Securities and Loans				(214)						(252)
Net Interest Income			$	25,395					$	20,102

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

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

44
(3) Net interest margin includes the tax equivalent adjustment and represents the annualized results of: (i) the difference between interest income on interest earning assets and the interest expense on interest bearing liabilities, divided by (ii) average interest earning assets for the period.

Table of Contents

~~(3)~~

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

Interest Rates and Operating Interest Differential

Increases and decreases in interest income and interest expense result from changes in average balances (volume) of interest earning assets and interest bearing liabilities, as well as changes in average interest rates. The following table presents the effect that these factors had on the interest earned on interest earning assets and the interest incurred on interest bearing liabilities. The effect of changes in volume is determined by multiplying the change in volume by the previous period’s average rate. Similarly, the effect of rate changes is calculated by multiplying the change in average rate by the previous period’s volume. The changes not attributable specifically to either volume or rate have been allocated to the changes due to volume. The following tables present the changes in the volume and rate of interest bearing assets and liabilities for the three months ended March 31, 2021, compared to the three months ended March 31, 2020.


	Three Months Ended March 31, 2021
	Compared with
	Three Months Ended March 31, 2020
	Change Due To:				Interest
(dollars in thousands)	Volume		Rate		Variance
Interest Earning Assets:
Cash Investments	$	24	$	(49)	$	(25)
Investment Securities:
Taxable Investment Securities		636		(300)		336
Tax-Exempt Investment Securities		(158)		15		(143)
Total Securities		478		(285)		193
Loans:
Paycheck Protection Program Loans		1,864		—		1,864
Loans		3,120		(2,196)		924
Total Loans		4,984		(2,196)		2,788
Federal Home Loan Bank Stock		(82)		60		(22)
Total Interest Earning Assets	$	5,404	$	(2,470)	$	2,934

Interest Bearing Liabilities:
Interest Bearing Transaction Deposits	$	132	$	(141)	$	(9)
Savings and Money Market Deposits		249		(1,146)		(897)
Time Deposits		(133)		(777)		(910)
Brokered Deposits		436		(673)		(237)
Total Deposits		684		(2,737)		(2,053)
Federal Funds Purchased		(1)		(106)		(107)
Notes Payable		(53)		(1)		(54)
FHLB Advances		(464)		(335)		(799)
Subordinated Debentures		718		(26)		692
Total Interest Bearing Liabilities		884		(3,205)		(2,321)
Net Interest Income	$	4,520	$	735	$	5,255

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

Net interest income was $25.4 million for the first quarter of 2021, an increase of $5.3 million, or 26.3%, compared to $20.1 million for the first quarter of 2020. The increase in net interest income was primarily due to growth in average interest earning assets, lower rates paid on deposits, and the recognition of PPP loan origination fees, offset partially by declining yields on loans and investment securities. The increase in average interest earning assets was primarily due to increased on-balance sheet liquidity, continued strong organic growth in the loan portfolio, as well as the funding of PPP loans.

Net interest margin (on a fully tax-equivalent basis) for the first quarter of 2021 was 3.60%, a 1 basis point increase from 3.59% in the first quarter of 2020.

For the Six Months Ended

June 30, 2020

June 30, 2019

Average

Interest

Yield/

Average

Interest

Yield/


Balance

& Fees

Rate

Balance

& Fees

Rate

(dollars in thousands)

Interest Earning Assets:

Cash Investments

$
69,267

$
96

0.28
%
$
33,071

$
258

1.57
%
Investment Securities:

Taxable Investment Securities

195,873

2,691

2.76

139,651

2,031

2.93

Tax-Exempt Investment Securities⁽¹⁾

93,260

2,021

4.36

106,823

2,276

4.30

Total Investment Securities

289,133

4,712

3.28

246,474

4,307

3.52

Paycheck Protection Loans ⁽²⁾

70,037

873

2.51

—

—

—

Loans ⁽¹⁾⁽²⁾

1,983,641

50,220

5.09

1,731,928

45,500

5.30

Total Loans

2,053,678

51,093

5.00

1,731,928

45,500

5.30

Federal Home Loan Bank Stock

10,370

225

4.37

7,802

200

5.17

Total Interest Earning Assets

2,422,448

56,126

4.66
%

2,019,275

50,265

5.02
%
Noninterest Earning Assets

47,208

21,327

Total Assets

$
2,469,656

$
2,040,602

Interest Bearing Liabilities:

Interest Bearing Transaction Deposits

259,704

807

0.63
%

192,020

619

0.65
%
Savings and Money Market Deposits

527,445

3,232

1.23

423,310

3,704

1.76

Time Deposits

382,256

4,300

2.26

341,836

4,001

2.36

Brokered Deposits

269,000

2,555

1.91

279,366

3,399

2.45

Total Deposits

1,438,405

10,894

1.52

1,236,532

11,723

1.91

Federal Funds Purchased

12,422

107

1.74

13,459

172

2.58

Notes Payable

12,253

226

3.71

14,250

251

3.55

FHLB Advances

183,099

2,091

2.30

127,713

1,602

2.53

Subordinated Debentures

27,986

872

6.27

24,660

770

6.30

Total Interest Bearing Liabilities

1,674,165

14,190

1.70
%

1,416,614

14,518

2.07
%
Noninterest Bearing Liabilities:

Noninterest Bearing Transaction Deposits

523,828

385,758

Other Noninterest Bearing Liabilities

18,708

9,605

Total Noninterest Bearing Liabilities

542,536

395,363

Shareholders' Equity

252,955

228,625

Total Liabilities and Shareholders' Equity

$
2,469,656

$
2,040,602

Net Interest Income / Interest Rate Spread

41,936

2.96
%

35,747

2.95
%
Net Interest Margin ⁽³⁾

3.48
%

3.57
%
Taxable Equivalent Adjustment:

Tax-Exempt Investment Securities

(492)

(478)

Net Interest Income

$
41,444

$
35,269

~~(1)~~

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

~~(2)~~

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

~~(3)~~

~~Interest Rates and Operating Interest Differential~~

Table of Contents

While the origination volume of PPP loans earning 1.00% negatively impacts net interest margin, the recognition of fees associated with the originations has benefited net interest margin for the first quarter of 2021. The SBA began forgiving PPP loans, which has accelerated the recognition of PPP fees starting in the fourth quarter of 2020 and continuing into the first quarter of 2021. The Company recognized $1.5 million of PPP origination fees during the first quarter of 2021, compared to no fees during the first quarter of 2020. The elevated fee recognition is illustrated in the 5.08% PPP loan yield for the first quarter of 2021.

The following table summarizes PPP loan originations and net origination fees through March 31, 2021:



	Originated				Outstanding				Program Lifetime
	Number		Principal		Number		Principal		Net Origination		Net Origination
(dollars in thousands)	of Loans		Balance		of Loans		Balance		Fees Generated		Fees Earned
Round One PPP Loans		1,200	$	181,600		412	$	93,114	$	5,706	$	4,359
Round Two PPP Loans		517		70,144		517		70,144		3,041		68
Totals		1,717	$	251,744		929	$	163,258	$	8,747	$	4,427

Average interest earning assets for the first quarter of 2021 increased $605.5 million, or 26.6%, to $2.88 billion, from $2.28 billion for the first quarter of 2020. This increase in average interest earning assets was primarily due to increased on-balance sheet liquidity and continued strong organic growth in the loan portfolio, including the funding of PPP loans. Average interest bearing liabilities increased $364.2 million, or 22.6%, to $1.97 billion for the first quarter of 2021, from $1.61 billion for the first quarter of 2020. The increase in average interest bearing liabilities was primarily due to an increase in interest bearing deposits and the issuance of subordinated debentures in the second quarter of 2020, offset partially by a decrease in federal funds purchased, notes payable and FHLB advances.

Average interest earning assets produced a tax-equivalent yield of 4.31% for the first quarter of 2021, compared to 4.90% for the first quarter of 2020. The decline in the yield on interest earning assets was primarily due to the historically low interest rate environment coupled with unprecedented liquidity, resulting in lower loan and security yields and excess cash balances. The average rate paid on interest bearing liabilities was 1.04% for the first quarter of 2021, compared to 1.84% for the first quarter of 2020 primarily due to lower rates paid on deposits, offset partially by strong growth of interest bearing deposits and additional subordinated debentures.

Interest Income. Total interest income, on a tax-equivalent basis, was $30.7 million for the first quarter of 2021, compared to $27.7 million for the first quarter of 2020. The $2.9 million, or 10.6%, increase in total interest income on a tax-equivalent basis was primarily due to continued organic growth in the loan portfolio and PPP loan income.

Interest income on loans, on a tax-equivalent basis, was $27.9 million for the first quarter of 2021, compared to $25.2 million for the first quarter of 2020. The $2.8 million, or 11.1%, increase was due to a 22.2% increase in the average balance of loans outstanding due to continued organic loan growth, which included $148.9 million of PPP loans.

Loan interest income and loan fees remain the primary contributing factors to the changes in yield on interest earning assets. The aggregate loan yield, excluding PPP loans, decreased to 4.72% in the first quarter of 2021, which was 45 basis points lower than 5.17% in the first quarter of 2020. While loan fees have maintained a relatively stable contribution to the aggregate loan yield, the historically low yield curve has resulted in a declining core yield on loans in comparison to prior periods.

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


	Three Months Ended
	March 31, 2021		December 31, 2020		September 30, 2020		June 30, 2020		March 31, 2020
Interest	4.50	%	4.59	%	4.69	%	4.76	%	4.90	%
Fees	0.22		0.28		0.24		0.25		0.27

Table of Contents

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

Three Months Ended June 30, 2020

Compared with

Three Months Ended June 30, 2019

Change Due To:

Interest
(dollars in thousands)

Volume

Rate

Variance
Interest Earning Assets:

Cash Investments

$
24

$
(158)

$
(134)
Investment Securities:

Taxable Investment Securities

399

(153)

246
Tax-Exempt Investment Securities

(128)

21

(107)
Total Securities

271

(132)

139
Loans:

Paycheck Protection Program Loans

873

—

873
Loans

3,147

(1,398)

1,749
Total Loans

4,020

(1,398)

2,622
Federal Home Loan Bank Stock

33

(8)

25
Total Interest Earning Assets

$
4,348

$
(1,696)

$
2,652

Interest Bearing Liabilities:

Interest Bearing Transaction Deposits

$
96

$
(106)

$
(10)
Savings and Money Market Deposits

225

(836)

(611)
Time Deposits

182

(180)

2
Brokered Deposits

219

(450)

(231)
Total Deposits

��
722

(1,572)

(850)
Federal Funds Purchased

(4)

(8)

(12)
Notes Payable

(19)

—

(19)
FHLB Advances

340

(103)

237
Subordinated Debentures

100

(14)

86
Total Interest Bearing Liabilities

1,139

(1,697)

(558)
Net Interest Income

$
3,209

$
1

$
3,210

~~Table of Contents~~

Six Months Ended June 30, 2020

Compared with

Six Months Ended June 30, 2019

Change Due To:

Interest
(dollars in thousands)


Volume


Rate


Variance
Interest Earning Assets:

Cash Investments

50

(212)

(162)
Investment Securities:

Taxable Investment Securities

778

(118)

660
Tax Exempt Investment Securities

(288)

32

(256)
Total Securities

490

(86)

404
Loans:

Paycheck Protection Program Loans

873

—

873
Loans

6,494

(1,774)

4,720
Total Loans

7,367

(1,774)

5,593
Federal Home Loan Bank Stock

59

(34)

25
Total Interest Earning Assets

$
7,966

$
(2,106)

$
5,860

Interest Bearing Liabilities:

Interest Bearing Transaction Deposits

$
213

$
(24)

$
189
Savings and Money Market Deposits

645

(1,117)

(472)
Time Deposits

464

(166)

298
Brokered Deposits

(91)

(753)

(844)
Total Deposits

1,231

(2,060)

(829)
Federal Funds Purchased

(9)

(56)

(65)
Notes Payable

(36)

11

(25)
FHLB Advances

636

(147)

489
Subordinated Debentures

106

(4)

102
Total Interest Bearing Liabilities

1,928

(2,256)

(328)
Net Interest Income

$
6,038

$
150

$
6,188

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

~~Second Quarter of 2020 Compared to Second Quarter of 2019~~

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

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

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

~~Table of Contents~~

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

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

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

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

Loan interest income and loan fees remain the primary contributing factors to the changes in yield on interest earning assets. The aggregate loan yield, excluding PPP loans, decreased to 5.01% in the second quarter of 2020, which is 32 basis points lower than 5.33% in the second quarter of 2019. While loan fees have maintained a stable contribution to aggregate loan yield, the historically low and flat yield curve has resulted in a declining core yield on loans in comparison to prior periods.4.72

~~The following table presents a summary of interest and fees recognized on loans, excluding PPP loans, for the periods indicated as follows:~~4.87

Three Months Ended

June 30, 2020

March 31, 2020

December 31, 2019

September 30, 2019

June 30, 2019

Interest

4.76
%

4.90
%

5.00
%

5.07
%

5.10
%
Fees

0.25

0.27

0.33

0.25

0.23

Yield on Loans, Excluding PPP

5.01
%

5.17
%

5.33
%

5.32
%

5.33
%

~~Interest Expense.~~ ~~Interest expense on interest bearing liabilities decreased $558,000, or 7.6%, to $6.8 million for the second quarter of 2020, compared to $7.4 million for the second quarter of 2019.~~ The cost of interest bearing liabilities declined 49 basis points from 2.07% in the second quarter of 2019 to 1.58% in the second quarter of 2020. Given the strong deposit growth and ample time deposit maturities over the next 12 months, the Company anticipates meaningful deposit repricing opportunities in future quarters. Furthermore, the Company will continue to evaluate strategies similar to a recent action that involved prepaying $25.0 million of long term FHLB advances, with a blended 2.89% cost, and supplementing with much lower cost core deposits.4.93

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

~~Table of Contents~~

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

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

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

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

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

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

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

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

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

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

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

~~Table of Contents~~

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

~~Provision for Loan Losses~~

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

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

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

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

Three Months Ended

Six Months Ended

June 30,

June 30,

June 30,

June 30,
(dollars in thousands)
2020

2019

2020

2019
Balance at Beginning of Period
$
24,585

$
20,607

$
22,526

$
20,031
Provision for Loan Losses

3,000

600

5,100

1,200
Charge-offs

(1)

(3)

(48)

(39)
Recoveries

49

158

55

170
Balance at End of Period
$
27,633

$
21,362

$
27,633

$
21,362

~~Noninterest Income~~

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

~~Table of Contents~~

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

Three Months Ended

Six Months Ended

June 30,

Increase/

June 30,

Increase/
(dollars in thousands)

2020

2019

(Decrease)

2020

2019

(Decrease)
Noninterest Income:

Customer Service Fees

$
135

$
189

$
(54)

$
375

$
380

$
(5)
Net Gain on Sales of Securities

1,361

463

898

1,364

458

906
Letter of Credit Fees

265

213

52

539

459

80
Debit Card Interchange Fees

99

109

(10)

191

197

(6)
Swap Fees

—

—

—

907

—

907
Other Income

117

160

(43)

320

274

46
Totals

$
1,977

$
1,134

$
843

$
3,696

$
1,768

$
1,928

~~Noninterest Expense~~

~~Second Quarter of 2020 Compared to Second Quarter of 2019~~

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

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

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

The Company expects future increases in noninterest expense as the Company continues investing in infrastructure to support balance sheet growth; particularly occupancy and equipment expense as the corporate headquarters nears completion. Management remains focused on supporting growth primarily by adding to staff, investing in technology, and by enhancing risk controls. Full-time equivalent employees increased from 150 at the end of the second quarter of 2019 to 173 at the end of the second quarter of 2020. The increase includes key strategic hires in deposit gathering, lending, risk management, and other supportive roles.5.01

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

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

~~Table of Contents~~

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

Three Months Ended

Six Months Ended

June 30,

Increase/

June 30,

Increase/
(dollars in thousands)

2020

2019

(Decrease)

2020

2019

(Decrease)
Noninterest Expense:

Salaries and Employee Benefits

$
6,348

$
5,124

$
1,224

$
12,802

$
9,926

$
2,876
Occupancy and Equipment

672

785

(113)

1,385

1,441

(56)
FDIC Insurance Assessment

168

285

(117)

358

570

(212)
Data Processing

238

151

87

467

304

163
Professional and Consulting Fees

423

451

(28)

908

839

69
Information Technology and Telecommunications

326

208

118

592

444

148
Marketing and Advertising

85

404

(319)

551

869

(318)
Intangible Asset Amortization

47

47

—

95

95

—
Amortization of Tax Credit Investments

362

1,390

(1,028)

447

1,567

(1,120)
FHLB Advance Prepayment Fees

1,430

—

1,430

1,430

—

1,430
Other Expense

612

629

(17)

1,422

1,304

118
Totals

$
10,711

$
9,474

$
1,237

$
20,457

$
17,359

$
3,098

~~Income Tax Expense~~5.17

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

Income tax expense was $2.0 million for the second quarter of 2020, compared to $1.2 million for the second quarter of 2019. The effective combined federal and state income tax rate for the second quarter of 2020 was 20.9%, compared to 12.9% for the second quarter of 2019. Income tax expense was $4.5 million for the six months ended June 30, 2020, compared to $3.5 million for the six months ended June 30, 2019. The effective combined federal and state income tax rate for the six months ended June 30, 2020 and 2019 was 23.2% and 18.7%, respectively. The higher effective combined rate compared to both prior periods was due to fewer tax credits being recognized.

Interest Expense. Interest expense on interest bearing liabilities decreased $2.3 million, or 31.5%, to $5.0 million for the first quarter of 2021, compared to $7.4 million for the first quarter of 2020. The cost of interest bearing liabilities declined 80 basis points from 1.84% in the first quarter of 2020 to 1.04% in the first quarter of 2021, primarily due to lower rates paid on deposits, offset partially by strong growth of interest bearing deposits and additional subordinated debentures.

Interest expense on deposits was $3.7 million for the first quarter of 2021, a decrease of $2.1 million, or 35.9%, from $5.7 million for the first quarter of 2020. The cost of total deposits declined 68 basis points from 1.27% in the first quarter of 2020, to 0.59% in the first quarter of 2021, primarily due to deposit rate cuts consistent with a lower rate environment and the downward repricing of time deposits. Given the strong deposit inflows and ample time deposit maturities over the next 12 months, the Company anticipates continued deposit repricing opportunities in the future.

Interest expense on borrowings decreased $268,000 to $1.4 million for the first quarter of 2021, compared to $1.6 million for the first quarter of 2020. This decrease was primarily due to lower average balances of federal funds purchased and FHLB advances, partially offset by a higher average balance of subordinated debentures due to the issuance of $50.0 million of subordinated debentures during the second quarter of 2020. It is worth noting, the significant FHLB de-leveraging strategy executed in the fourth quarter of 2020 has begun to manifest lower interest bearing liability costs in the current quarter.

Provision for Loan Losses

The provision for loan losses was $1.1 million for the first quarter of 2021, a decrease of $1.0 million, compared to the provision for loan losses of $2.1 million for the first quarter of 2020. The provision recorded in the first quarter of 2021 was primarily attributable to growth of the loan portfolio.

The allowance for loan losses to total loans was 1.48% at March 31, 2021, compared to 1.23% at March 31, 2020. The allowance for loan losses to total loans, excluding $163.3 million of PPP loans, was 1.59% at March 31, 2021. The increase in the allowance for loan losses to total loans ratio between the periods was primarily due to economic uncertainties and evolving risks driven by the impact of the COVID-19 pandemic.

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

The following table presents the activity in the allowance for loan losses for the three month period ended March 31, 2021 and 2020:


	Three Months Ended
	March 31,		March 31,
(dollars in thousands)	2021		2020
Balance at Beginning of Period	$	34,841	$	22,526
Provision for Loan Losses		1,100		2,100
Charge-offs		(14)		(47)
Recoveries		60		6
Balance at End of Period	$	35,987	$	24,585

Table of Contents

Noninterest Income

Noninterest income was $1.0 million for the first quarter of 2021, a decrease of $711,000 from $1.7 million for the first quarter of 2020. The decrease was primarily due to lower swap fees, partially offset by increased letter of credit fees and other miscellaneous items.

The following table presents the major components of noninterest income for the three months ended March 31, 2021, compared to the three months ended March 31, 2020:


	Three Months Ended
	March 31,				Increase/
(dollars in thousands)	2021		2020		(Decrease)
Noninterest Income:
Customer Service Fees	$	234	$	240	$	(6)
Net Gain on Sales of Securities		—		3		(3)
Letter of Credit Fees		327		274		53
Debit Card Interchange Fees		130		92		38
Swap Fees		—		907		(907)
Other Income		317		203		114
Totals	$	1,008	$	1,719	$	(711)

Noninterest Expense

Noninterest expense was $10.9 million for the first quarter of 2021, an increase of $1.2 million from $9.7 million for the first quarter of 2020. The increase was primarily driven by a $648,000 increase in salaries and employee benefits as the result of merit increases and increased staff to meet the needs of the Company’s growth, a $342,000 increase in occupancy and equipment expense, and a $196,000 increase in information technology expense. The overall increase in noninterest expense was partially offset by a decrease of $180,000 in marketing and advertising expense.

Full-time equivalent employees increased from 170 at the end of the first quarter of 2020 to 200 at the end of the first quarter of 2021. Despite the uncertainty surrounding the COVID-19 pandemic, the Company continues to attract strategic hires in lending, deposit gathering, technology, risk management, and other supportive roles which further demonstrates the Company’s status as a preferred employer amidst ongoing market disruption.

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

The efficiency ratio was 41.2% for the first quarter of 2021, compared to 44.4% for the first quarter of 2020. While the recognition of the tax credits increases operating expenses, and concurrently the efficiency ratio, it directly reduces income tax expense and the effective tax rate. Excluding the impact of certain non-routine income and expenses from noninterest expense, the adjusted efficiency ratio, a non-GAAP measure, decreased to 40.7% for the first quarter of 2021, compared to 44.1% for the first quarter of 2020. The efficiencies of the Company's "branch-light" model have been evident throughout the pandemic, and going forward, have positioned the Company well to continue making investments in technology as the industry adapts to evolving client behavior.

Table of Contents

The following table presents the major components of noninterest expense for the three months ended March 31, 2021, compared to the three months ended March 31, 2020:


	Three Months Ended
	March 31,				Increase/
(dollars in thousands)	2021		2020		(Decrease)
Noninterest Expense:
Salaries and Employee Benefits	$	7,102	$	6,454	$	648
Occupancy and Equipment		1,055		713		342
FDIC Insurance Assessment		315		190		125
Data Processing		291		229		62
Professional and Consulting Fees		544		485		59
Information Technology and Telecommunications		462		266		196
Marketing and Advertising		286		466		(180)
Intangible Asset Amortization		48		48		—
Amortization of Tax Credit Investments		118		85		33
Other Expense		702		810		(108)
Totals	$	10,923	$	9,746	$	1,177

Income Tax Expense

Income tax expense was $3.7 million for the first quarter of 2021, compared to $2.5 million for the first quarter of 2020. The effective combined federal and state income tax rate for the first quarter of 2021 was 25.8%, compared to 25.4% for the first quarter of 2020. The higher income tax expense was primarily due to higher income before taxes in the first quarter of 2021 compared to the first quarter of 2020.

Financial Condition

Assets

Total assets at ~~June 30, 2020~~March 31, 2021 were ~~$2.75~~$3.07 billion, an increase of ~~$485.6~~$145.0 million, or ~~21.4%~~5.0%, over total assets of ~~$2.27~~$2.93 billion at December 31, ~~2019~~2020 and an increase of ~~$630.8~~$653.6 million, or ~~29.7%~~27.0%, over total assets of ~~$2.12~~$2.42 billion at ~~June 30, 2019.~~March 31, 2020. The ~~growth~~linked-quarter increase in ~~both periods~~total assets was primarily ~~driven by~~due to strong organic loan growth and excess cash balances linked to continued strong deposit inflows. The year-over-year increase in ~~the~~total assets was primarily due to organic loan ~~portfolio, which included $180.2~~growth, PPP loan growth, purchases of investment securities, and excess cash balances.

Total gross loans at March 31, 2021 were $2.43 billion, an increase of $99.7 million, or 4.3%, over total gross loans of $2.33 billion at December 31, 2020, and an increase of $423.3 million, or 21.1%, over total gross loans of $2.00 billion at March 31, 2020. When excluding the PPP loans, ~~and higher levels~~gross loans grew by $74.9 million during the first quarter of ~~on-balance sheet liquidity.~~2021, or 13.9% on an annualized basis.

Investment Securities Portfolio

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

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The investment securities portfolio consists primarily of municipal securities, U.S. government agency mortgage backed securities, SBA securities, and corporate securities comprised of subordinated debentures of bank and

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financial holding companies. In addition, the Company also holds U.S. treasury securities, asset-backed securities and other debt securities, all with varying contractual maturities. These maturities do not necessarily represent the expected life of the securities as the securities may be called or paid down without penalty prior to their stated maturities. All investment securities are held as available for sale.

Securities available for sale were ~~$326.3~~$397.3 million at ~~June 30, 2020,~~March 31, 2021, compared to ~~$289.9~~$390.6 million at December 31, ~~2019,~~2020, an increase of ~~$36.4~~$6.7 million or ~~12.6%~~1.7%. At ~~June 30, 2020,~~March 31, 2021, municipal securities represented ~~30.9%~~30.7% of the investment securities portfolio, government agency mortgage-backed securities represented ~~28.7%~~30.9% of the portfolio, SBA securities represented ~~13.5%~~9.6% of the portfolio, corporate securities represented ~~17.0%~~18.6% of the portfolio, U.S. treasury securities represented 0.2% of the portfolio, asset-backed securities represented ~~9.6%~~9.8% of the portfolio, and other mortgage-backed securities represented ~~0.3%~~0.2% of the portfolio.

The following table presents the amortized cost and fair value of securities available for sale, by type, at ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019:~~2020:


	June 30, 2020				December 31, 2019				March 31, 2021				December 31, 2020
	Amortized		Fair		Amortized		Fair		Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value		Cost		Value		Cost		Value
U.S. Treasury Securities	$	—	$	—	$	4,990	$	4,998	$	1,010	$	1,011	$	—	$	—
SBA Securities		44,599		44,054		50,126		49,559		38,327		38,051		40,455		40,107
Mortgage-Backed Securities Issued or Guaranteed by U.S. Agencies (MBS):
Residential Pass-Through:
Guaranteed by GNMA		1,058		1,122		1,195		1,215		842		901		892		957
Issued by FNMA and FHLMC		6,509		6,592		3,571		3,543		15,455		15,490		16,067		16,117
Other Residential Mortgage-Backed Securities		72,653		73,546		46,464		46,695		95,720		94,429		94,440		94,409
Commercial Mortgage-Backed Securities		11,675		12,456		12,019		12,213		11,229		11,775		11,254		12,032
All Other Commercial MBS		905		908		1,063		1,062		667		671		742		745
Total MBS		92,800		94,624		64,312		64,728		123,913		123,266		123,395		124,260
Municipal Securities		93,780		100,722		99,441		105,743		115,544		122,122		105,975		115,012
Corporate Securities		55,258		55,630		49,674		50,176		72,038		74,071		71,116		72,155
Asset-Backed Securities		31,437		31,265		14,673		14,673		37,456		38,805		38,135		39,095
Total	$	317,874	$	326,295	$	283,216	$	289,877	$	388,288	$	397,326	$	379,076	$	390,629

Loan Portfolio

The Company focuses on lending to borrowers located or investing in the Minneapolis-St. Paul-Bloomington, MN-WI Metropolitan Statistical Area across a diverse range of industries and property types. The Company lends primarily to commercial customers, consisting of loans secured by nonfarm, nonresidential properties, multifamily residential properties, land, and non-real estate business assets. Responsive service, local decision making, and an efficient turnaround time from application to closing have been significant factors in growing the loan portfolio.

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

The Company originated net loan exposures of ~~$242.7 million, excluding PPP loans, for the second quarter of 2020, compared to $266.4~~$326.0 million for the ~~second~~first quarter of ~~2019.~~2021, compared to $200.0 million for the first quarter of 2020. Net loan exposures include principal advances and unfunded commitments on newly originated loans, net of loan participations ~~sold.~~sold and PPP loan originations. Total gross loans increased ~~$281.7~~$99.7 million, or ~~14.7%~~4.3%, to ~~$2.19~~$2.43 billion at ~~June 30, 2020,~~March 31, 2021, compared to ~~$1.91~~$2.33 billion at December 31, ~~2019~~2020 and increased ~~$408.9~~$423.3 million, or 22.9%, from $1.78 billion at June 30, 2019. The increase in both periods included $180.2 million of PPP loans funded in the second quarter of 2020. The commercial, 1-4 family mortgage, and commercial real estate, or CRE, nonowner occupied categories contributed most significantly to the $101.5 million net loan growth, excluding PPP loans, in the six months

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~~ended June 30,~~or 21.1%, from $2.00 billion at March 31, 2020. As of ~~June 30, 2020, commercial~~March 31, 2021, construction and land development loans increased ~~$26.5~~$23.2 million, or ~~9.6%~~13.6%, ~~1-4 family mortgage~~multifamily loans increased ~~$28.8~~$39.0 million, or ~~11.1%~~6.2%, and nonowner occupied CRE loans increased ~~$35.1~~$11.1 million, or ~~5.9%~~1.6%, when compared to December 31, ~~2019.~~2020. Collectively, the Company’s annualized loan growth for the ~~six~~three months ended ~~June 30, 2020~~March 31, 2021, excluding PPP loans, was ~~10.6%~~13.9%. ~~The Company anticipates that its loan growth will slow in the future as a result of the COVID-19 pandemic and the related decline in economic conditions in its market area.~~

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


	June 30, 2020				March 31, 2020				December 31, 2019				September 30, 2019				June 30, 2019				March 31, 2021				December 31, 2020				September 30, 2020				June 30, 2020				March 31, 2020
	Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent
(dollars in thousands)
Commercial	$	302,536	13.8	%	$	299,425	15.0	%	$	276,035	14.5	%	$	291,723	15.8	%	$	287,804	16.1	%	$	301,023	12.4	%	$	304,220	13.1	%	$	287,254	12.7	%	$	302,536	13.8	%	$	299,425	15.0	%
Paycheck Protection Program		180,228	8.2			—	—			—	—			—	—			—	—			163,258	6.7			138,454	6.0			181,596	8.0			180,228	8.2			—	—
Construction and Land Development		191,768	8.7			183,350	9.2			196,776	10.3			216,054	11.7			195,568	11.0			193,372	8.0			170,217	7.3			175,882	7.8			191,768	8.7			183,350	9.2
Real Estate Mortgage:
1 - 4 Family Mortgage		289,456	13.2			272,590	13.6			260,611	13.6			254,782	13.8			247,029	13.8			294,964	12.2			294,479	12.7			286,089	12.7			289,456	13.2			272,590	13.6
Multifamily		522,491	23.8			536,380	26.8			515,014	26.9			456,257	24.7			437,198	24.5			665,415	27.4			626,465	26.9			585,814	25.9			522,491	23.8			536,380	26.8
CRE Owner Occupied		73,539	3.4			75,207	3.8			66,584	3.5			71,209	3.9			68,681	3.9			79,665	3.3			75,604	3.2			75,963	3.4			73,539	3.4			75,207	3.8
CRE Nonowner Occupied		627,651	28.6			631,541	31.4			592,545	31.0			551,992	29.9			544,579	30.5			720,396	29.7			709,300	30.5			660,058	29.2			627,651	28.6			631,541	31.4
Total Real Estate Mortgage Loans		1,513,137	69.0			1,515,718	75.6			1,434,754	75.0			1,334,240	72.3			1,297,487	72.7			1,760,440	72.6			1,705,848	73.3			1,607,924	71.2			1,513,137	69.0			1,515,718	75.6
Consumer and Other		6,109	0.3			4,324	0.2			4,473	0.2			4,201	0.2			4,044	0.2			8,030	0.3			7,689	0.3			6,572	0.3			6,109	0.3			4,324	0.2
Total Loans, Gross		2,193,778	100.0	%		2,002,817	100.0	%		1,912,038	100.0	%		1,846,218	100.0	%		1,784,903	100.0	%		2,426,123	100.0	%		2,326,428	100.0	%		2,259,228	100.0	%		2,193,778	100.0	%		2,002,817	100.0	%
Allowance for Loan Losses		(27,633)				(24,585)				(22,526)				(22,124)				(21,362)				(35,987)				(34,841)				(31,381)				(27,633)				(24,585)
Net Deferred Loan Fees		(10,287)				(5,336)				(5,512)				(5,788)				(5,157)				(11,273)				(9,151)				(10,367)				(10,287)				(5,336)
Total Loans, Net	$	2,155,858			$	1,972,896			$	1,884,000			$	1,818,306			$	1,758,384			$	2,378,863			$	2,282,436			$	2,217,480			$	2,155,858			$	1,972,896

The Company’s primary focus historically has been on real estate mortgage lending, which constituted ~~75.2%~~77.8% of the portfolio, excluding PPP loans, as of ~~June 30, 2020.~~March 31, 2021. The composition of the portfolio has remained consistent with prior periods and the Company does not expect any significant changes in the foreseeable future in the composition of the loan portfolio or in the emphasis on real estate lending.

As of ~~June 30, 2020,~~March 31, 2021, investor CRE loans totaled ~~$1.34~~$1.58 billion, consisting of ~~$627.7~~$720.4 million of loans secured by nonowner occupied CRE, ~~$522.5~~$665.4 million of loans secured by multifamily residential properties and ~~$191.8~~$193.4 million of construction and land development loans. Investor CRE loans represented ~~66.6%~~69.8% of the total gross loan portfolio, excluding PPP loans, and ~~429.6%~~459.5% of the Bank’s total risk-based capital at ~~June 30, 2020,~~March 31, 2021, compared to ~~516.6%~~455.8% at December 31, ~~2019.~~2020.

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The following ~~table presents~~tables present time to contractual maturity and sensitivity to interest rate changes for the loan portfolio at ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019:~~2020:


	As of June 30, 2020						As of March 31, 2021
	Due in One Year		More Than One				Due in One Year		More Than One
(dollars in thousands)	or Less		Year to Five Years		After Five Years		or Less		Year to Five Years		After Five Years
Commercial	$	131,348	$	132,948	$	38,240	$	107,314	$	138,283	$	55,426
Paycheck Protection Program		—		180,228		—		—		163,258		—
Construction and Land Development		105,646		57,094		29,028		85,278		65,757		42,337
Real Estate Mortgage:
1 - 4 Family Mortgage		64,218		184,587		40,651		61,973		187,720		45,271
Multifamily		67,960		198,424		256,107		80,505		228,352		356,558
CRE Owner Occupied		15,556		17,596		40,387		9,239		16,485		53,941
CRE Nonowner Occupied		121,980		264,913		240,758		141,619		286,695		292,082
Total Real Estate Mortgage Loans		269,714		665,520		577,903		293,336		719,252		747,852
Consumer and Other		2,745		2,564		800		3,751		3,603		676
Total Loans, Gross	$	509,453	$	1,038,354	$	645,971	$	489,679	$	1,090,153	$	846,291
Interest Rate Sensitivity:
Fixed Interest Rates	$	168,007	$	827,083	$	246,059	$	209,709	$	808,838	$	425,298
Floating or Adjustable Rates		341,446		211,271		399,912		279,970		281,315		420,993
Total Loans, Gross	$	509,453	$	1,038,354	$	645,971	$	489,679	$	1,090,153	$	846,291


	As of December 31, 2019						As of December 31, 2020
	Due in One Year		More Than One				Due in One Year		More Than One
(dollars in thousands)	or Less		Year to Five Years		After Five Years		or Less		Year to Five Years		After Five Years
Commercial	$	121,383	$	119,575	$	35,077	$	135,237	$	119,798	$	49,185
Paycheck Protection Program								—		138,454		—
Construction and Land Development		132,221		53,194		11,361		100,060		44,637		25,520
Real Estate Mortgage:
1 - 4 Family Mortgage		53,707		170,116		36,788		66,928		184,038		43,513
Multifamily		117,406		168,770		228,838		70,262		235,447		320,756
CRE Owner Occupied		4,078		25,286		37,220		14,930		16,701		43,973
CRE Nonowner Occupied		114,533		234,599		243,413		151,439		268,640		289,221
Total Real Estate Mortgage Loans		289,724		598,771		546,259		303,559		704,826		697,463
Consumer and Other		1,589		2,420		464		2,889		4,040		760
Total Loans, Gross	$	544,917	$	773,960	$	593,161	$	541,745	$	1,011,755	$	772,928
Interest Rate Sensitivity:
Fixed Interest Rates	$	184,370	$	545,855	$	197,151	$	219,464	$	777,201	$	336,008
Floating or Adjustable Rates		360,547		228,105		396,010		322,281		234,554		436,920
Total Loans, Gross	$	544,917	$	773,960	$	593,161	$	541,745	$	1,011,755	$	772,928

Asset Quality

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

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questionable and improbable.” Assets classified as “loss” are those considered “uncollectible” and of such little value

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

The following table presents information on loan classifications at ~~June 30, 2020.~~March 31, 2021. The Company had no assets classified as doubtful or loss.


	Risk Category						Risk Category
(dollars in thousands)	Watch		Substandard		Total		Watch		Substandard		Total
Commercial	$	21,515	$	254	$	21,769	$	28,013	$	1,273	$	29,286
Construction and Land Development		132		164		296		—		146		146
Real Estate Mortgage:
1 - 4 Family Mortgage		1,497		1,229		2,726		699		1,356		2,055
Multifamily		—		—		—
CRE Owner Occupied		818		1,840		2,658		—		870		870
CRE Nonowner Occupied		21,689		220		21,909		29,544		3,081		32,625
Total Real Estate Mortgage Loans		24,004		3,289		27,293		30,243		5,307		35,550
Consumer and Other		—		33		33		—		13		13
Totals	$	45,651	$	3,740	$	49,391	$	58,256	$	6,739	$	64,995

The Company ~~is closely analyzing~~has increased oversight and analysis of all segments ~~within~~of the loan portfolio in response to the COVID-19 pandemic, especially in vulnerable industries such as hospitality and ~~although the Company has not seen direct impacts~~restaurants, to ~~the asset quality metrics through June 30, 2020, management believes the economic uncertainty~~proactively monitor evolving credit risk. Loans that ~~exists may begin to negatively impact the portfolio in future quarters. At June 30, 2020,~~have potential weaknesses that warrant a watchlist ~~loans~~risk rating at March 31, 2021, were ~~$45.7~~$58.3 million, compared to ~~$5.3~~$44.8 million at December 31, ~~2019. Due to management’s diligent action in identifying watchlist loans during the first quarter of 2020, there were no additional loans added to the watchlist in the second quarter of~~ 2020. As the COVID-19 pandemic continues to evolve, the length and extent of the economic ~~contraction~~uncertainty may ~~dictate~~result in further watchlist or adverse classifications in the loan portfolio. Loans that warranted a substandard risk rating at March 31, 2021 were $6.7 million, compared to $15.2 at December 31, 2020.

~~In response~~The Company has developed programs for clients who are experiencing business and personal disruptions due to the COVID-19 pandemic ~~the Company is offering~~by providing interest-only modifications, loan ~~modifications, when appropriate, to borrowers who were current and otherwise not past due as of December 31, 2019.~~ ~~These include modifications in the form of~~ payment deferrals, ~~fee waivers, extensions of repayment terms, or other delays in payment.~~and extended amortization modifications. In accordance with interagency regulatory guidance and the CARES Act, ~~these modifications are~~qualifying loans modified in response to the COVID-19 pandemic will not be considered ~~to be~~ TDRs. There was no new modification activity in the first quarter of 2021. The Company had 19 modified loans totaling $37.1 million outstanding as of March 31, 2021, representing 1.6% of the loan portfolio, excluding PPP loans.

The following table presents a rollforward of loan modification activity, by modification type, from December 31,2020 to March 31, 2021:


(dollars in thousands)	Interest-Only		Payment Deferral		Extended Amortization		Total
Principal Balance - December 31, 2020	$	61,105	$	613	$	4,834	$	66,552
Modification Expired		(29,396)		—		—		(29,396)
Net Principal Advances (Payments)		(46)		5		(32)		(73)
Principal Balance - March 31, 2021	$	31,663	$	618	$	4,802	$	37,083

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The following table presents a summary of ~~closed~~active loan modifications, by loan segment and modification type, ~~as of June 30, 2020.~~at March 31, 2021:


	Interest-Only			Payment Deferral			Total
	Amount		# of Loans	Amount		# of Loans	Amount		# of Loans	Interest-Only			Payment Deferral			Extended Amortization			Total
(dollars in thousands)										Amount		# of Loans	Amount		# of Loans	Amount		# of Loans	Amount		# of Loans
Commercial	$	17,615	36	$	13,355	14	$	30,970	50	$	3,547	7	$	—	—	$	4,802	1	$	8,349	8
Construction and Land Development		133	1		—	—		133	1
Real Estate Mortgage:
1 - 4 Family Mortgage		8,037	22		420	2		8,457	24
Multifamily		41,320	6		16,251	3		57,571	9
CRE Owner Occupied		7,397	14		1,502	3		8,899	17		—	—		618	3		—	—		618	3
CRE Nonowner Occupied		100,805	41		86,175	18		186,980	59		28,116	8		—	—		—	—		28,116	8
Consumer and Other		—	—		—	—		—	—
Totals	$	175,307	120	$	117,703	40	$	293,010	160	$	31,663	15	$	618	3	$	4,802	1	$	37,083	19

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

Nonperforming Assets

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

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acquired through foreclosure). Nonaccrual loans totaled ~~$602,000~~$770,000 and ~~$461,000~~$775,000 as of ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, respectively, ~~an increase~~a decrease of ~~$141,000.~~$5,000. There were no loans 90 days past due and still accruing as of ~~June 30, 2020~~March 31, 2021 or December 31, ~~2019.~~2020. There were no foreclosed assets as of ~~June 30, 2020 and~~March 31, 2021 or December 31, ~~2019.~~2020.

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


	June 30,			December 31,			March 31,			December 31,
(dollars in thousands)	2020			2019			2021			2020
Nonaccrual Loans:
Commercial	$	7		$	7		$	6		$	6
Construction and Land Development		164			176			146			156
Real Estate Mortgage:
1 - 4 Family Mortgage		431			278
CRE Owner Occupied								618			613
Total Real Estate Mortgage Loans								618			613
Total Nonaccrual Loans	$	602		$	461		$	770		$	775
Total Nonperforming Loans	$	602		$	461		$	770		$	775
Plus: Foreclosed Assets								—			—
Total Nonperforming Assets ⁽¹⁾	$	602		$	461		$	770		$	775
Total Restructured Accruing Loans		667			276			262			265
Total Nonperforming Assets and Restructured Accruing Loans	$	1,269		$	737		$	1,032		$	1,040
Nonaccrual Loans to Total Loans		0.03	%		0.02	%		0.03	%		0.03	%
Nonperforming Loans to Total Loans		0.03			0.02			0.03			0.03
Nonperforming Assets to Total Loans Plus Foreclosed Assets ⁽¹⁾		0.03			0.02			0.03			0.03
Nonperforming Assets and Restructured Accruing Loans to Total Loans Plus Foreclosed Assets		0.06			0.04			0.04			0.04

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

The balance of nonperforming assets can fluctuate due to changes in economic conditions. The Company has established a policy to discontinue accruing interest on a loan (that is, place the loan on nonaccrual status) after it has become 90 days delinquent as to payment of principal or interest, unless the loan is considered to be well-collateralized and is actively in the process of collection. In addition, a loan will be placed on nonaccrual status before it becomes 90 days delinquent unless management believes that the collection of interest is expected. Interest previously accrued but uncollected on such loans is reversed and charged against current income when the receivable is determined to be uncollectible. If management believes that a loan will not be collected in full, an increase to the allowance for loan losses is recorded to reflect management’s estimate of any potential exposure or loss. Generally, payments received on

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nonaccrual loans are applied directly to principal. Gross income that would have been recorded on nonaccrual loans during ~~for~~ the three ~~and six~~ months ended ~~June 30, 2020~~March 31, 2021 was ~~$16 and $31, respectively.~~$19,000.

Allowance for Loan Losses

The allowance for loan losses is a reserve established through charges to earnings in the form of a provision for loan losses. The Company maintains an allowance for loan losses at a level management considers adequate to provide for known and probable incurred losses in the portfolio. The level of the allowance is based on management’s evaluation of estimated losses in the portfolio, after consideration of risk characteristics of the loans and prevailing and anticipated economic conditions. Loan charge-offs (i.e., loans judged to be uncollectible) are charged against the reserve and any subsequent recovery is credited to the reserve. The Company analyzes risks within the loan portfolio on a continual basis. A risk system, consisting of multiple grading categories for each portfolio class, is utilized as an analytical tool to assess risk and appropriate reserves. In addition to the risk system, management further evaluates risk characteristics of the loan portfolio under current and anticipated economic conditions, including the economic distress caused by the COVID-19 pandemic, and considers such factors as the financial condition of the borrower, past and expected loss experience, and other factors which management feels deserve recognition in establishing an appropriate reserve. These estimates are reviewed at least quarterly, and as adjustments become necessary, they are recognized in the periods in which they become known. Although management strives to maintain an allowance it deems adequate, future economic changes, deterioration of borrowers’ creditworthiness, and the impact of examinations by regulatory agencies all could cause changes to the allowance for loan losses.

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At ~~June 30, 2020,~~March 31, 2021, the allowance for loan losses was ~~$27.6~~$36.0 million, an increase of ~~$5.1~~$1.1 million from ~~$22.5~~$34.8 million at December 31, ~~2019.~~2020. Net charge-offs (recoveries) totaled ~~$(48,000)~~($46,000) during the ~~second~~first quarter of ~~2020~~2021 and ~~$(155,000)~~$41,000 during the ~~second~~first quarter of ~~2019. Net charge-offs (recoveries) totaled $(7,000) for the six months ended June 30, 2020 and $(131,000) for the six months ended June 30, 2019.~~2020. The allowance for loan losses as a percentage of total loans was ~~1.26%~~1.48% as of ~~June 30, 2020~~March 31, 2021 and ~~1.18%~~1.50% as of December 31, ~~2019.~~2020. The allowance for loan losses to total loans, excluding ~~$180.2~~$163.3 million of PPP loans, was ~~1.37%~~1.59% as of June 30, 2020. Based on current economic indicators, the Company increased the economic factors within the allowance for loan losses evaluation. The Company expects that the allowance for loan losses as a percentMarch 31, 2021 and December 31, 2021.

Table of ~~total loans will increase in future periods based on its belief that the credit quality of its loan portfolio will decline, and loan defaults will increase as a result of COVID-19.~~Contents

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


	Three Months Ended						Six Months Ended						Three Months Ended
	June 30,						June 30,						March 31,
(dollars in thousands)	2020			2019			2020			2019			2021			2020
Balance, Beginning of Period	$	24,585		$	20,607		$	22,526		$	20,031		$	34,841		$	22,526
Charge-offs:
Commercial		—			—			34			19			—			34
Real Estate Mortgage:
1 - 4 Family Mortgage														5			—
Total Real Estate Mortgage Loans														5			—
Consumer and Other		1			3			14			20			9			13
Total Charge-offs		1			3			48			39			14			47
Recoveries:
Commercial		2			1			4			3			19			2
Construction and Land Development		—			1			—			1
Real Estate Mortgage:
1 - 4 Family Mortgage		46			153			48			162			3			2
CRE Owner Occupied														32			—
Total Real Estate Mortgage Loans														35			2
Consumer and Other		1			3			3			4			6			2
Total Recoveries		49			158			55			170			60			6
Net Recoveries		(48)			(155)			(7)			(131)
Net Charge-offs (Recoveries)														(46)			41
Provision for Loan Losses		3,000			600			5,100			1,200			1,100			2,100
Balance at End of Period	$	27,633		$	21,362		$	27,633		$	21,362		$	35,987		$	24,585
Gross Loans, End of Period		2,193,778			1,784,903			2,193,778			1,784,903			2,426,123			2,002,817
Average Loans		2,152,398			1,755,686			2,053,678			1,731,928			2,389,919			1,954,959
Net Charge-offs (Recoveries) (Annualized) to Average Loans		(0.01)	%		(0.04)	%		—	%		(0.02)	%		(0.01)	%		0.01	%
Allowance to Total Gross Loans		1.26	%		1.20	%		1.26	%		1.20	%		1.48	%		1.23	%
Allowance to Total Gross Loans, Excluding PPP Loans														1.59	%		N/A

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


	June 30,				December 31,				March 31,				December 31,
	2020				2019				2021				2020
(dollars in thousands)	Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent
Commercial	$	5,192	18.8	%	$	3,058	13.6	%	$	6,451	17.9	%	$	5,703	16.4	%
Paycheck Protection Program		90	0.3			—	—			83	0.2			70	0.2
Construction and Land Development		2,173	7.9			2,202	9.8			2,773	7.7			2,491	7.1
Real Estate Mortgage:
1 - 4 Family Mortgage		3,322	12.0			2,839	12.6			3,894	10.8			3,972	11.4
Multifamily		6,697	24.3			5,824	25.9			9,856	27.4			9,517	27.3
CRE Owner Occupied		964	3.5			792	3.5			1,187	3.3			1,162	3.3
CRE Nonowner Occupied		8,323	30.1			6,972	30.9			11,026	30.7			10,991	31.6
Total Real Estate Mortgage Loans		19,306	69.9			16,427	72.9			25,963	72.2			25,642	73.6
Consumer and Other		174	0.6			85	0.4			232	0.6			203	0.6
Unallocated		698	2.5			754	3.3			485	1.4			732	2.1
Total Allowance for Loan Losses	$	27,633	100.0	%	$	22,526	100.0	%	$	35,987	100.0	%	$	34,841	100.0	%

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Deposits

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


	June 30, 2020				March 31, 2020				December 31, 2019				September 30, 2019				June 30, 2019				March 31, 2021				December 31, 2020				September 30, 2020				June 30, 2020				March 31, 2020
(dollars in thousands)	Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent
Noninterest Bearing Transaction Deposits	$	648,869	28.9	%	$	476,217	25.1	%	$	447,509	24.5	%	$	478,493	26.5	%	$	409,198	24.1	%	$	712,999	27.0	%	$	671,903	26.9	%	$	685,773	30.2	%	$	648,869	28.9	%	$	476,217	25.1	%
Interest Bearing Transaction Deposits		285,386	12.7			255,483	13.4			264,627	14.5			243,889	13.5			231,318	13.6			433,344	16.4			366,290	14.6			322,253	14.2			285,386	12.7			255,483	13.4
Savings and Money Market Deposits		516,543	23.0			514,113	27.1			516,785	28.3			470,518	26.1			456,447	26.9			791,583	30.0			657,617	26.3			498,397	21.9			516,543	23.0			514,113	27.1
Time Deposits		382,187	17.1			393,340	20.7			360,027	19.8			363,308	20.2			359,338	21.1			344,581	13.1			353,543	14.1			363,897	16.0			382,187	17.1			393,340	20.7
Brokered Deposits		409,066	18.3			260,974	13.7			234,362	12.9			246,028	13.7			242,964	14.3			356,147	13.5			452,283	18.1			402,724	17.7			409,066	18.3			260,974	13.7
Total Deposits	$	2,242,051	100.0	%	$	1,900,127	100.0	%	$	1,823,310	100.0	%	$	1,802,236	100.0	%	$	1,699,265	100.0	%	$	2,638,654	100.0	%	$	2,501,636	100.0	%	$	2,273,044	100.0	%	$	2,242,051	100.0	%	$	1,900,127	100.0	%

Total deposits at ~~June 30, 2020~~March 31, 2021 were ~~$2.2~~$2.64 billion, an increase of ~~$418.7~~$137.0 million, or ~~23.0%~~5.5%, compared to total deposits of ~~$1.82~~$2.50 billion at December 31, ~~2019,~~2020, and an increase of ~~$542.8~~$738.5 million, or ~~31.9%~~38.9%, over total deposits of ~~$1.70~~$1.90 billion at ~~June 30, 2019.~~March 31, 2020. Noninterest bearing transaction deposits were ~~$648.9~~$713.0 million at ~~June 30, 2020,~~March 31, 2021, compared to ~~$447.5~~$671.9 million at December 31, ~~2019,~~2020, and ~~$409.2~~$476.2 million at ~~June 30, 2019.~~March 31, 2020. Noninterest bearing deposits comprised ~~28.9%~~27.0% of total deposits at ~~June 30, 2020,~~March 31, 2021, compared to ~~24.5%~~26.9% at December 31, ~~2019,~~2020, and ~~24.1%~~25.1% at ~~June 30, 2019.~~March 31, 2020. The growth in ~~noninterest bearing transaction~~core, non-maturity deposits was primarily attributable to general increases in existing client accounts, as personal and business depositors elected to conserve cash liquidity amidst the ongoing COVID-19 pandemic. The Company estimates approximately $60.0 million of the noninterest bearing transaction deposit growth was due to remaining PPP loan funds. The Company expects that deposit levels will fluctuate in future periods as a result of both successful new client acquisition initiatives and pandemic-related accumulation of liquidity by existing clients. Given the ~~distressed economic conditions~~fluid environment, management believes deposits could experience fluctuations in ~~its market areas relating to the COVID-19 pandemic.~~future periods.

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

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operating expense. When appropriate, the Company utilizes alternative funding sources such as brokered deposits. At June 30, 2020, total brokered deposits were $409.1 million, an increase of $174.7 million, or 74.5%, compared to total brokered deposits of $234.4 million at December 31, 2019. Brokered deposits increased as a result of a change in mix of wholesale funding sources due to favorable funding costs offered compared to other wholesale funding alternatives and to expand on-balance sheet liquidity in this uncertain environment. Furthermore, theThe brokered deposit market provides flexibility in structure, optionality and efficiency not afforded in traditional retail deposit channels.At March 31, 2021, total brokered deposits were $356.1 million, a decrease of $96.1 million, or 21.3%, compared to total brokered deposits of $452.3 million at December 31, 2020. The strong deposit inflows have provided the flexibility to let higher cost deposits roll off and reduce reliance on brokered deposits in the interim.

The following table presents the average balance and average rate paid on each of the following deposit categories for the three months ended ~~June 30, 2020~~March 31, 2021 and ~~June 30, 2019:~~2020:


	As of and for the				As of and for the				As of and for the				As of and for the
	Three Months Ended				Three Months Ended				Three Months Ended				Three Months Ended
	June 30, 2020				June 30, 2019				March 31, 2021				March 31, 2020
	Average		Average		Average		Average		Average		Average		Average		Average
(dollars in thousands)	Balance		Rate		Balance		Rate		Balance		Rate		Balance		Rate
Noninterest Bearing Transaction Deposits	$	603,456	—	%	$	401,480	—	%	$	676,173	—	%	$	444,201	—	%
Interest Bearing Transaction Deposits		272,565	0.56			202,886	0.77			364,017	0.47			246,843	0.70
Savings and Money Market Deposits		521,313	1.02			431,716	1.80			724,104	0.56			533,578	1.44
Time Deposits < $250,000		241,009	2.30			231,349	2.28			259,389	1.46			246,017	2.39
Time Deposits > $250,000		147,348	2.03			122,678	2.63			85,326	1.59			130,137	2.20
Brokered Deposits		319,711	1.69			266,804	2.37			402,694	0.98			218,289	2.23
Total Deposits	$	2,105,402	0.99	%	$	1,656,913	1.46	%	$	2,511,703	0.59	%	$	1,819,065	1.27	%

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Borrowed Funds

Federal Funds Purchased

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


	As of and for the			As of and for the			As of and for the			As of and for the			As of and for the
	Three Months Ended			Three Months Ended			Three Months Ended			Three Months Ended			Three Months Ended
(dollars in thousands)	June 30, 2020			December 31, 2019			June 30, 2019			March 31, 2021			March 31, 2020
Outstanding at Period-End	$	—		$	—		$	—		$	—		$	—
Average Amount Outstanding		9			3,011			2,089			—			24,835
Maximum Amount Outstanding at any Month-End		—			6,000			8,000			—			37,000
Weighted Average Interest Rate:
During Period		0.72	%		1.82	%		2.24	%		—	%		1.74	%
End of Period		0.40	%		2.63	%		2.38	%		0.28	%		0.36	%

Other Borrowings

At ~~June 30, 2020,~~March 31, 2021, other borrowings outstanding consisted of FHLB advances of ~~$147.5~~$57.5 million. The Company’s $11.0 million ~~and notes~~note payable ~~of $12.0 million. During~~matured during the ~~second~~first quarter of ~~2020,~~2021 and was paid off in full at maturity. On March 1, 2021, the Company ~~paid off~~entered into a Loan and Security Agreement and revolving note which has made a $25.0 million revolving line of ~~fixed rate FHLB advances with an average cost~~credit available to the Company, secured by 100% of ~~2.89%~~the issued and ~~incurred a loss on extinguishment~~outstanding stock of ~~debt~~the Bank. The maturity of ~~$1.4 million.~~ the line of credit is February 28, 2023. As of March 31, 2021, there were no outstanding balances under the revolving line of credit.

As part of the CARES Act, the Federal Reserve Bank offered secured borrowings to banks who originated PPP loans through the Paycheck Protection Program Liquidity Facility, or PPPLF. As of March 31, 2021, the Company had not pledged any PPP loans to borrow funds under this facility. The facility is available through June 30, 2021.

The Company’s borrowing capacity at the FHLB is determined based on collateral pledged, generally consisting of loans. The Company had additional borrowing capacity under this credit facility of ~~$230.9~~$430.8 million and~~$209.8~~ $361.2 million at ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019, respectively, based on collateral amounts pledged.~~

2020, respectively.

Additionally, the Company has borrowing capacity from other sources. As of ~~June 30, 2020,~~March 31, 2021, the Bank was eligible to use the Federal Reserve discount window for borrowings. Based on assets pledged as collateral as of the applicable date, the Bank’s borrowing availability was approximately ~~$107.6~~$84.8 million and ~~$113.2~~$76.8 million at

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~~June 30, 2020~~ March 31, 2021 and December 31, ~~2019,~~2020, respectively. As of ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, the Company had no outstanding advances.

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

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

Subordinated Debentures

On June 19, 2020, the Company issued $50.0 million of subordinated debentures at an initial fixed interest rate of 5.25% which is payable semi-annually. Beginning July 1, 2025, the interest rate converts to a variable interest rate equal to the three-month term SOFR, plus 5.13%, which is payable quarterly. The subordinated debentures mature on July 1, 2030. The subordinated debentures, net of issuance costs, were ~~$48.9~~$49.0 million at ~~June 30, 2020.~~March 31, 2021. On October 13, 2020, the Company completed an offer to exchange up to $50.0 million total principal amount of the subordinated debentures for substantially identical subordinated debentures registered under the Securities Act of 1933, in satisfaction of the Company’s obligations under a registration rights agreement entered into with the initial purchasers of the subordinated debentures. $47.0 million of the $50.0 million of the subordinated debentures were exchanged in the exchange offer.

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On July 12, 2017, the Company issued $25.0 million of subordinated debentures at an initial fixed interest rate of 5.875% which is payable semi-annually. Beginning July 15, 2022, the interest rate converts to a variable interest rate equal to the three-month LIBOR plus 3.88%. The subordinated debentures mature on July 15, 2027. The subordinated debentures, net of issuance costs, were ~~$24.8~~$24.9 million at ~~June 30, 2020,~~March 31, 2021, compared to ~~$24.7~~$24.8 million at December 31, ~~2019.~~2020.

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

Contractual Obligations

The following table presents supplemental information regarding total contractual obligations at ~~June 30, 2020:~~March 31, 2021:


	Within		One to		Three to		After				Within		One to		Three to		After
(dollars in thousands)	One Year		Three Years		Five Years		Five Years		Total		One Year		Three Years		Five Years		Five Years		Total
Deposits Without a Stated Maturity	$	1,595,808	$	—	$	—	$	—	$	1,595,808	$	2,056,929	$	—	$	—	$	—	$	2,056,929
Time Deposits		402,562		126,681		117,000		—		646,243		231,061		125,136		188,145		37,383		581,725
Notes Payable		12,000		—		—		—		12,000
FHLB Advances		25,000		31,500		86,000		5,000		147,500		15,000		5,000		33,500		4,000		57,500
Subordinated Debentures		—		—		—		75,000		75,000		—		—		—		75,000		75,000
Commitment to Fund Tax Credit Investments		3,405		—		—		—		3,405		1,683		—		—		—		1,683
Operating Lease Obligations		648		682		649		965		2,944		505		990		996		805		3,296
Totals	$	2,039,423	$	158,863	$	203,649	$	80,965	$	2,482,900	$	2,305,178	$	131,126	$	222,641	$	117,188	$	2,776,133

On August 27, 2018, the Bank and Reuter Walton Commercial, LLC, or the Contractor, entered into a Standard Form of Agreement Between Owner and Contractor and the corresponding General Conditions of the Contract for Construction (collectively, the “Construction Contract”). Under the Construction Contract, the Contractor is constructing the core and shell of a new headquarters building for the Bank in St. Louis Park, Minnesota, and the Bank will pay the Contractor a contract price consisting of the cost of work plus a fee equal to 3.75% of the cost of work, subject to a guaranteed maximum price of $23.0 million, with anticipated construction to be completed in the third quarter of 2020. As of June 30, 2020, $22.9 million had been paid under this Construction Contract. On December 3, 2019, the Bank entered into a contract with a third party relating to the construction of the interior build-out of the new headquarters building for the Bank. The sum of the contract is $6.32 million, with anticipated construction to be completed in the third quarter of 2020. As of June 30, 2020, $5.0 million had been paid under this contract.

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

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

Shareholders’ Equity

Shareholders’ equity at ~~June 30, 2020~~March 31, 2021 was ~~$257.2~~$279.1 million, an increase of ~~$12.4~~$13.8 million, or ~~5.1%~~5.2%, over shareholders’ equity of ~~$244.8~~$265.4 million at December 31, ~~2019,~~2020, primarily due to ~~$15.0~~$10.7 million of net income ~~partially offset by~~and a ~~$1.5~~$2.7 million ~~decrease~~increase in accumulated other comprehensive income, ~~and $2.0 million~~partially offset by $208,000 of stock repurchases inunder the ~~first quarter of 2020.~~Company’s stock repurchase program. The ~~decrease~~increase in accumulated other comprehensive income primarily resulted from interest rate fluctuations between periods.

Stock Repurchase Program. On January 22, 2019, the Company adopted a stock repurchase program. Under the repurchase program, the Company iswas initially authorized to repurchase up to $15.0 million of its common stock in open market transactions or through privately negotiated transactions at the Company’s discretion. On July 23, 2019 and October 27, 2020, the ~~Company’s Board~~Company's board of ~~Directors~~directors approved a $10.0 million ~~increase~~and $15.0 million increases, respectively, to the ~~Company’s~~program for a total authorization of $40.0 million. Additionally, on October 27, 2020, the program duration was extended to run through October 27, 2022.

The Company remains committed to maintaining strong capital levels while enhancing shareholder value as it strategically executes its stock repurchase program ~~increasing the authorization to repurchase common stock under the program from a total of $15.0 million to a total of $25.0 million.~~in this fluid economic environment. During the ~~three and six months ended June 30, 2020,~~first quarter of 2021, the Company repurchased ~~-0- and 177,864~~16,618 shares of its common stock ~~respectively, representing less than 1% of the Company’s outstanding shares. Shares were repurchased during the first quarter of 2020~~ at a weighted average price of ~~$11.52~~$12.50 for a total of ~~$2.0 million.~~$208,000. All shares repurchased under the stock repurchase program were converted to authorized but unissued shares. At ~~June 30, 2020,~~March 31, 2021, the remaining amount that could be used to repurchase shares under the stock repurchase program was ~~$8.0~~$14.5 million. Although the stock repurchase program remains in place, the Company has not repurchased any shares since March 16, 2020. The Company remains committed to maintaining strong capital levels and will consider the current economic environment and the uncertainty of the long-term impact of the COVID-19 pandemic when evaluating its future utilization of the stock repurchase program. Management currently does not expect to begin repurchasing shares again until the effects of the COVID-19 pandemic have subsided.

Regulatory Capital. The Company and the Bank are subject to various regulatory capital requirements administered by federal banking regulators. Failure to meet minimum capital requirements can initiate certain mandatory

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

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

Management believes the Company and the Bank met all capital adequacy requirements to which they were subject as of ~~June 30, 2020.~~March 31, 2021. The regulatory capital ratios for the Company and the Bank to meet the minimum capital adequacy standards and for the Bank to be considered well capitalized under the prompt corrective action framework are set forth in the following tables. The Company’s and the Bank’s actual capital amounts and ratios are as of the dates indicated.

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					Minimum Required				For Capital Adequacy				To be Well Capitalized								Minimum Required				For Capital Adequacy				To be Well Capitalized
					For Capital Adequacy				Purposes Plus Capital				Under Prompt Corrective								For Capital Adequacy				Purposes Plus Capital				Under Prompt Corrective
	Actual				Purposes				Conservation Buffer				Action Regulations				Actual				Purposes				Conservation Buffer				Action Regulations
June 30, 2020	Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio
March 31, 2021																	Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio

	(dollars in thousands)																(dollars in thousands)
Company (Consolidated):
Total Risk-Based Capital	$	351,627	15.99	%	$	175,889	8.00	%	$	230,854	10.50	%		N/A	N/A		$	372,720	14.46	%	$	206,221	8.00	%	$	270,665	10.50	%		N/A	N/A
Tier 1 Risk-Based Capital		250,480	11.39			131,917	6.00			186,882	8.50			N/A	N/A			266,621	10.34			154,666	6.00			219,110	8.50			N/A	N/A
Common Equity Tier 1 Capital		250,480	11.39			98,937	4.50			153,903	7.00			N/A	N/A			266,621	10.34			115,999	4.50			180,443	7.00			N/A	N/A
Tier 1 Leverage Ratio		250,480	9.94			100,750	4.00			100,750	4.00			N/A	N/A			266,621	9.11			117,121	4.00			117,121	4.00			N/A	N/A
Bank:
Total Risk-Based Capital	$	312,358	14.21	%	$	175,816	8.00	%	$	230,759	10.50	%	$	219,770	10.00	%	$	343,660	13.33	%	$	206,202	8.00	%	$	270,640	10.50	%	$	257,753	10.00	%
Tier 1 Risk-Based Capital		284,880	12.96			131,862	6.00			186,805	8.50			175,816	8.00			311,390	12.08			154,652	6.00			219,090	8.50			206,202	8.00
Common Equity Tier 1 Capital		284,880	12.96			98,897	4.50			153,839	7.00			142,851	6.50			311,390	12.08			115,989	4.50			180,427	7.00			167,539	6.50
Tier 1 Leverage Ratio		284,880	11.36			100,289	4.00			100,289	4.00			125,361	5.00			311,390	10.65			116,939	4.00			116,939	4.00			146,174	5.00


					Minimum Required				For Capital Adequacy				To be Well Capitalized								Minimum Required				For Capital Adequacy				To be Well Capitalized
					For Capital Adequacy				Purposes Plus Capital				Under Prompt Corrective								For Capital Adequacy				Purposes Plus Capital				Under Prompt Corrective
	Actual				Purposes				Conservation Buffer				Action Regulations				Actual				Purposes				Conservation Buffer				Action Regulations
December 31, 2019	Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio
December 31, 2020																	Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio

	(dollars in thousands)																(dollars in thousands)
Company (Consolidated):
Total Risk-Based Capital	$	269,613	12.98	%	$	166,163	8.00	%	$	218,089	10.50	%		N/A	N/A		$	360,198	14.58	%	$	197,604	8.00	%	$	259,355	10.50	%		N/A	N/A
Tier 1 Risk-Based Capital		236,533	11.39			124,623	6.00			176,549	8.50			N/A	N/A			255,530	10.35			148,203	6.00			209,954	8.50			N/A	N/A
Common Equity Tier 1 Capital		236,533	11.39			93,467	4.50			145,393	7.00			N/A	N/A			255,530	10.35			111,152	4.50			172,904	7.00			N/A	N/A
Tier 1 Leverage Ratio		236,533	10.69			88,498	4.00			88,498	4.00			N/A	N/A			255,530	9.28			110,168	4.00			110,168	4.00			N/A	N/A
Bank:
Total Risk-Based Capital	$	252,501	12.16	%	$	166,137	8.00	%	$	218,055	10.50	%	$	207,671	10.00	%	$	330,380	13.37	%	$	197,629	8.00	%	$	259,388	10.50	%	$	247,036	10.00	%
Tier 1 Risk-Based Capital		243,461	11.72			124,603	6.00			176,521	8.50			166,137	8.00			299,447	12.12			148,222	6.00			209,981	8.50			197,629	8.00
Common Equity Tier 1 Capital		243,461	11.72			93,452	4.50			145,370	7.00			134,986	6.50			299,447	12.12			111,166	4.50			172,925	7.00			160,574	6.50
Tier 1 Leverage Ratio		243,461	11.01			88,455	4.00			88,455	4.00			110,569	5.00			299,447	10.89			109,972	4.00			109,972	4.00			137,465	5.00

The Company and the Bank are subject to the rules of the Basel III regulatory capital framework and related Dodd-Frank Wall Street Reform and Consumer Protection Act. The rules require a capital conservation buffer of 2.5% that was added to the minimum requirements for capital adequacy purposes. A banking organization with a conservation buffer of less than the required amount is subject to limitations on capital distributions, including dividend payments,

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stock repurchases and certain discretionary bonus payments to executive officers. At ~~June 30, 2020,~~March 31, 2021, the ratios for the Company and the Bank were sufficient to meet the conservation buffer.

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

~~Table of Contents~~

Off-Balance Sheet Arrangements

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

The Company’s exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit, standby letters of credit, and commercial letters of credit is represented by the contractual or notional amount of those instruments. The Company decreases its exposure to losses under these commitments by subjecting them to credit approval and monitoring procedures. The Company assesses the credit risk associated with certain commitments to extend credit and establishes a liability for probable credit losses.

The following table presents credit arrangements and financial instruments whose contract amounts represent credit risk as of ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019:~~2020:


	June 30, 2020				December 31, 2019				March 31, 2021				December 31, 2020
	Fixed		Variable		Fixed		Variable		Fixed		Variable		Fixed		Variable

	(dollars in thousands)
(dollars in thousands)
Unfunded Commitments Under Lines of Credit	$	184,430	$	307,943	$	181,622	$	319,340	$	317,891	$	427,714	$	243,988	$	400,350
Letters of Credit		14,679		67,998		17,503		61,722		15,698		79,214		10,954		79,252
Totals	$	199,109	$	375,941	$	199,125	$	381,062	$	333,589	$	506,928	$	254,942	$	479,602

Liquidity

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

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

In addition, the Bank is a member of the American Financial Exchange, or AFX, through which it may either borrow or lend funds on an overnight or short-term basis with a group of approved commercial banks. The availability of funds changes daily. As of ~~June 30, 2020,~~March 31, 2021, the Company had no borrowings outstanding through the AFX. The Bank

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has also established additional borrowing capacity through the Federal Reserve Bank’s PPPLF, where it can pledge PPP loans to borrow an equal amount of funds. As of ~~June 30, 2020,~~March 31, 2021, the Company had no borrowings outstanding through this facility and ~~$180.2~~$163.3 million of PPP loans available to pledge. The facility is available through ~~September~~June 30, ~~2020.~~2021.

~~Table of Contents~~

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


Primary Liquidity—On-Balance Sheet	June 30, 2020			December 31, 2019			March 31, 2021			December 31, 2020

	(Dollars in thousands)
(Dollars in thousands)
Cash and Cash Equivalents	$	178,428		$	31,935		$	191,885		$	145,348
Securities Available for Sale		326,295			289,877			397,326			390,629
Total Primary Liquidity	$	504,723		$	321,812		$	589,211		$	535,977
Ratio of Primary Liquidity to Total Deposits		22.5	%		17.6	%		22.3	%		21.4	%


Secondary Liquidity—Off-Balance Sheet
Borrowing Capacity	June 30, 2020			December 31, 2019			March 31, 2021			December 31, 2020

	(Dollars in thousands)
(Dollars in thousands)
Net Secured Borrowing Capacity with the FHLB	$	230,875		$	209,840		$	430,827		$	361,236
Net Secured Borrowing Capacity with the Federal Reserve Bank		107,636			113,164			84,791			76,830
Unsecured Borrowing Capacity with Correspondent Lenders		105,000			105,000			143,000			143,000
Secured Borrowing Capacity with Correspondent Lender								25,000			—
Total Secondary Liquidity	$	443,511		$	428,004		$	683,618		$	581,066
Ratio of Primary and Secondary Liquidity to Total Deposits		42.3	%		41.1	%		48.2	%		44.7	%

During the ~~six~~three months ended ~~June 30, 2020,~~March 31, 2021, primary liquidity increased by ~~$182.9~~$53.2 million due to a ~~$146.5~~$46.5 million increase in cash and cash equivalents and a ~~$36.4~~$6.7 million increase in securities available for sale, when compared to December 31, ~~2019.~~2020. Secondary liquidity increased by ~~$15.5~~$102.6 million as of ~~June 30, 2020~~March 31, 2021 when compared to December 31, ~~2019,~~2020, due to a ~~$21.0~~$69.6 million increase in the borrowing capacity on the secured borrowing line with the FHLB, ~~partially offset by a $5.5~~an $8.0 million ~~decrease~~increase in the borrowing capacity on the secured credit line with the Federal Reserve ~~Bank.~~Bank and a $25.0 million increase due to the addition of a secured revolving line of credit with a correspondent lender.

In addition to primary liquidity, the Company generates liquidity from cash flows from the loan and securities portfolios and from the large base of core customer deposits, defined as noninterest bearing transaction, interest bearing transaction, savings, non-brokered money market accounts and non-brokered time deposits less than $250,000. At ~~June 30, 2020,~~March 31, 2021, core deposits totaled approximately ~~$1.70~~$2.20 billion and represented ~~75.7%~~83.5% of total deposits. These core deposits are normally less volatile, often with customer relationships tied to other products offered by the Company, which promote long-standing relationships and stable funding sources.

The Company uses brokered deposits, the availability of which is uncertain and subject to competitive market forces and regulation, for liquidity management purposes. At ~~June 30, 2020,~~March 31, 2021, brokered deposits totaled ~~$409.1~~$356.1 million, consisting of ~~$264.1~~$202.1 million of brokered time deposits and ~~$145.0~~$154.0 million of non-maturity brokered money market and transaction accounts. At December 31, ~~2019,~~2020, brokered deposits totaled ~~$234.4~~$452.3 million, consisting of ~~$231.9~~$292.6 million of brokered time deposits and ~~$2.4~~$159.7 million of non-maturity brokered money market and transaction accounts.

The Company’s liquidity policy includes guidelines for On-Balance Sheet Liquidity (a measurement of primary liquidity to total deposits plus borrowings), Total On-Balance Sheet Liquidity with Borrowing Capacity (a measurement of primary and secondary liquidity to total deposits plus borrowings), Wholesale Funding Ratio (a measurement of total wholesale funding to total deposits plus borrowings), and other guidelines developed for measuring and maintaining liquidity. As of ~~June 30, 2020,~~March 31, 2021, the Company was in compliance with all established liquidity guidelines in the policy.

Non-GAAP Financial Measures

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

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

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

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

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

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

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


	For the Three Months Ended
	March 31,			December 31,			September 30,			June 30,			March 31,
	2021			2020			2020			2020			2020
(dollars in thousands)
Efficiency Ratio
Noninterest Expense	$	10,923		$	15,258		$	9,672		$	10,711		$	9,746
Less: Amortization of Intangible Assets		(48)			(48)			(48)			(47)			(48)
Adjusted Noninterest Expense	$	10,875		$	15,210		$	9,624		$	10,664		$	9,698
Net Interest Income		25,395			24,841			21,679			21,342			20,102
Noninterest Income		1,008			986			1,157			1,977			1,719
Less: Gain on Sales of Securities		—			(30)			(109)			(1,361)			(3)
Adjusted Operating Revenue	$	26,403		$	25,797		$	22,727		$	21,958		$	21,818
Efficiency Ratio		41.2	%		59.0	%		42.3	%		48.6	%		44.4	%

Adjusted Efficiency Ratio
Noninterest Expense	$	10,923		$	15,258		$	9,672		$	10,711		$	9,746
Less: Amortization of Tax Credit Investments		(118)			(146)			(145)			(362)			(85)
Less: FHLB Advance Prepayment Fees		—			(5,613)			—			(1,430)			—
Less: Amortization of Intangible Assets		(48)			(48)			(48)			(47)			(48)
Adjusted Noninterest Expense	$	10,757		$	9,451		$	9,479		$	8,872		$	9,613
Net Interest Income		25,395			24,841			21,679			21,342			20,102
Noninterest Income		1,008			986			1,157			1,977			1,719
Less: Gain on Sales of Securities		—			(30)			(109)			(1,361)			(3)
Adjusted Operating Revenue	$	26,403		$	25,797		$	22,727		$	21,958		$	21,818
Adjusted Efficiency Ratio		40.7	%		36.6	%		41.7	%		40.4	%		44.1	%

~~following tables.~~


	For the Three Months Ended
	March 31,			December 31,			September 30,			June 30,			March 31,
	2021			2020			2020			2020			2020
(dollars in thousands)
Pre-Provision Net Revenue
Noninterest Income	$	1,008		$	986		$	1,157		$	1,977		$	1,719
Less: Gain on sales of Securities		—			(30)			(109)			(1,361)			(3)
Total Operating Noninterest Income		1,008			956			1,048			616			1,716
Plus: Net Interest income		25,395			24,841			21,679			21,342			20,102
Net Operating Revenue	$	26,403		$	25,797		$	22,727		$	21,958		$	21,818

Noninterest Expense	$	10,923		$	15,258		$	9,672		$	10,711		$	9,746
Less: Amortization of Tax Credit Investments		(118)			(146)			(145)			(362)			(85)
Less: FHLB Advance Prepayment Fees		—			(5,613)			—			(1,430)			—
Total Operating Noninterest Expense	$	10,805		$	9,499		$	9,527		$	8,919		$	9,661

Pre-Provision Net Revenue	$	15,598		$	16,298		$	13,200		$	13,039		$	12,157

Plus:
Non-Operating Revenue Adjustments		—			30			109			1,361			3
Less:
Provision for Loan Losses		1,100			3,900			3,750			3,000			2,100
Non-Operating Expense Adjustments		118			5,759			145			1,792			85
Provision for Income Taxes		3,709			1,690			2,240			2,010			2,532
Net Income	$	10,671		$	4,979		$	7,174		$	7,598		$	7,443

Average Assets	$	2,940,262		$	2,816,032		$	2,711,755		$	2,622,272		$	2,317,040
Pre-Provision Net Revenue Return on Average Assets		2.15	%		2.30	%		1.94	%		2.00	%		2.11	%

6557

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For the Three Months Ended

For the Six Months Ended

June 30,

March 31,

December 31,

September 30,

June 30,

June 30,

June 30,


2020

2020

2019

2019

2019

2020

2019

(dollars in thousands)

Efficiency Ratio

Noninterest Expense

$
10,711

$
9,746

$
10,489

$
9,084

$
9,474

$
20,457

$
17,359

Less: Amortization of Intangible Assets

(47)

(48)

(48)

(48)

(47)

(95)

(95)

Adjusted Noninterest Expense

$
10,664

$
9,698

$
10,441

$
9,036

$
9,427

$
20,362

$
17,264

Net Interest Income

21,342

20,102

19,928

18,935

18,138

41,444

35,269

Noninterest Income

1,977

1,719

1,112

946

1,134

3,696

1,768

Less: Gain on Sales of Securities

(1,361)

(3)

—

(58)

(463)

(1,364)

(458)

Adjusted Operating Revenue

$
21,958

$
21,818

$
21,040

$
19,823

$
18,809

$
43,776

$
36,579

Efficiency Ratio

48.6
%

44.4
%

49.6
%

45.6
%

50.1
%

46.5
%

47.2
%

Adjusted Efficiency Ratio

Noninterest Expense

$
10,711

$
9,746

$
10,489

$
9,084

$
9,474

$
20,457

$
17,359

Less: Amortization of Tax Credit Investments

(362)

(85)

(1,128)

(530)

(1,390)

(447)

(1,567)

Less: FHLB Advance Prepayment Fees

(1,430)

—

—

—

—

(1,430)

—

Less: Amortization of Intangible Assets

(47)

(48)

(48)

(48)

(47)

(95)

(95)

Adjusted Noninterest Expense

$
8,872

$
9,613

$
9,313

$
8,506

$
8,037

$
18,485

$
15,697

Net Interest Income

21,342

20,102

19,928

18,935

18,138

41,444

35,269

Noninterest Income

1,977

1,719

1,112

946

1,134

3,696

1,768

Less: Gain on Sales of Securities

(1,361)

(3)

—

(58)

(463)

(1,364)

(458)

Adjusted Operating Revenue

$
21,958

$
21,818

$
21,040

$
19,823

$
18,809

$
43,776

$
36,579

Adjusted Efficiency Ratio

40.4
%

44.1
%

44.3
%

42.9
%

42.7
%

42.2
%

42.9
%

For the Three Months Ended

For the Six Months Ended

June 30,

March 31,

December 31,

September 30,

June 30,

June 30,

June 30,

2020

2020

2019

2019

2019

2020

2019
(dollars in thousands)

Pre-Provision Net Revenue

Noninterest Income

$
1,977

$
1,719

$
1,112

$
946

$
1,134

$
3,696

$
1,768

Less: Gain on sales of Securities

(1,361)

(3)

—

(58)

(463)

(1,364)

(458)

Total Operating Noninterest Income

616

1,716

1,112

888

671

2,332

1,310

Plus: Net Interest income

21,342

20,102

19,928

18,935

18,138

41,444

35,269

Net Operating Revenue

$
21,958

$
21,818

$
21,040

$
19,823

$
18,809

$
43,776

$
36,579

Noninterest Expense

$
10,711

$
9,746

$
10,489

$
9,084

$
9,474

$
20,457

$
17,359

Less: Amortization of Tax Credit Investments

(362)

(85)

(1,128)

(530)

(1,390)

(447)

(1,567)

Less: FHLB Advance Prepayment Fees

(1,430)

—

—

—

—

(1,430)

—

Total Operating Noninterest Expense

$
8,919

$
9,661

$
9,361

$
8,554

$
8,084

$
18,580

$
15,792

Pre-Provision Net Revenue

$
13,039

$
12,157

$
11,679

$
11,269

$
10,725

$
25,196

$
20,787

Plus:

Non-Operating Revenue Adjustments

1,361

3

—

58

463

1,364

458

Less:

Provision for Loan Losses

3,000

2,100

600

900

600

5,100

1,200

Non-Operating Expense Adjustments

1,792

85

1,128

530

1,390

1,877

1,567

Provision for Income Taxes

2,010

2,532

1,380

2,092

1,189

4,542

3,451

Net Income

$
7,598

$
7,443

$
8,571

$
7,805

$
8,009

$
15,041

$
15,027

Average Assets

$
2,622,272

$
2,317,040

$
2,221,370

$
2,168,909

$
2,069,707

$
2,469,656

$
2,040,602

Pre-Provision Net Revenue Return on Average Assets

2.00
%

2.11
%

2.09
%

2.08
%

2.08
%

2.05
%

2.05
%

~~Table of Contents~~


	For the Three Months Ended																For the Six Months Ended			For the Three Months Ended
	June 30,			March 31,			December 31,			September 30,			June 30,				June 30,		June 30,	March 31,			December 31,			September 30,			June 30,			March 31,
	2020			2020			2019			2019			2019				2020		2019	2021			2020			2020			2020			2020
(dollars in thousands)
Tangible Common Equity and Tangible Common Equity/Tangible Assets
Common Equity	$	257,190		$	248,143		$	244,794		$	236,059		$	229,137						$	279,171		$	265,405		$	265,432		$	257,190		$	248,143
Less: Intangible Assets		(3,391)			(3,439)			(3,487)			(3,535)			(3,582)							(3,248)			(3,296)			(3,344)			(3,391)			(3,439)
Tangible Common Equity		253,799			244,704			241,307			232,524			225,555						$	275,923		$	262,109		$	262,088		$	253,799		$	244,704

Total Assets		2,754,463			2,418,730			2,268,830			2,232,339			2,123,631						$	3,072,359		$	2,927,345		$	2,774,564		$	2,754,463		$	2,418,730
Less: Intangible Assets		(3,391)			(3,439)			(3,487)			(3,535)			(3,582)							(3,248)			(3,296)			(3,344)			(3,391)			(3,439)
Tangible Assets	$	2,751,072		$	2,415,291		$	2,265,343		$	2,228,804		$	2,120,049						$	3,069,111		$	2,924,049		$	2,771,220		$	2,751,072		$	2,415,291
Tangible Common Equity/Tangible Assets		9.23	%		10.13	%		10.65	%		10.43	%		10.64	%						8.99	%		8.96	%		9.46	%		9.23	%		10.13	%

Tangible Book Value Per Share
Book Value Per Common Share	$	8.92		$	8.61		$	8.45		$	8.20		$	7.90						$	9.92		$	9.43		$	9.25		$	8.92		$	8.61
Less: Effects of Intangible Assets		(0.12)			(0.12)			(0.12)			(0.12)			(0.12)							(0.12)			(0.12)			(0.12)			(0.12)			(0.12)
Tangible Book Value Per Common Share	$	8.80		$	8.49		$	8.33		$	8.08		$	7.78						$	9.80		$	9.31		$	9.13		$	8.80		$	8.49

Return on Average Tangible Common Equity
Net Income																				$	10,671		$	4,979		$	7,174		$	7,598		$	7,443

Average Common Equity																				$	272,729		$	265,716		$	263,195		$	255,109		$	250,800
Less: Effects of Average Intangible Assets																					(3,276)			(3,323)			(3,371)			(3,419)			(3,466)
Average Tangible Common Equity																				$	269,453		$	262,393		$	259,824		$	251,690		$	247,334
Average Common Equity	$	255,109		$	250,800		$	240,188		$	232,590		$	231,374		$	252,955	$	228,625
Less: Average Intangible Assets		(3,419)			(3,466)			(3,510)			(3,558)			(3,605)			(3,442)		(3,630)
Average Tangible Common Equity	$	251,690		$	247,334		$	236,678		$	229,032		$	227,769		$	249,513	$	224,995
Return on Average Tangible Common Equity																					16.06	%		7.55	%		10.98	%		12.14	%		12.10	%

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk

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

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

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

The Company has entered into certain hedging transactions including interest rate swaps and caps, which are designed to lessen elements of the Company’s interest rate exposure. Cash flow hedge relationships mitigate exposure to the variability of future cash flows or other forecasted transactions. The Company utilizes cash flow hedges to manage interest rate exposure for the brokered ~~certificate of~~ deposit and wholesale borrowing ~~and notes payable~~ portfolios. ~~The hedging strategy converts variable interest rates to a fixed interest rate~~At March 31, 2021 and ~~is used in an effort to protect the Company from floating interest rate variability. At June 30, 2020 and December 31, 2019, these cash flow hedges had a total notional amount of~~

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~~$107.0~~December 31, 2020, these cash flow hedges had a total notional amount of $165.0 million and ~~$48.0~~$161.0 million, respectively. In the event that interest rates do not change in the manner anticipated, such transactions may adversely affect the Company’s results of operations.

Net Interest Income Simulation

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

Potential changes to the Company’s net interest income in hypothetical rising and declining rate scenarios calculated as of ~~June 30, 2020~~March 31, 2021 are presented in the table below. The projections assume an immediate, parallel shift downward of the yield curve of 100 basis points and immediate, parallel shifts upward of the yield curve of 100, 200, 300 and 400 basis points. In the current interest rate environment, a downward shift of the yield curve of 200, 300 and 400 basis points does not provide us with meaningful results and thus is not presented.


	June 30, 2020				December 31, 2019					March 31, 2021				December 31, 2020
Change (basis points) in Interest Rates	Forecasted Net		Percentage Change		Forecasted Net		Percentage Change			Forecasted Net		Percentage Change		Forecasted Net		Percentage Change
(12-Month Projection)	Interest Income		from Base		Interest Income		from Base			Interest Income		from Base		Interest Income		from Base
+400	$	82,229	16.44	%	$	80,558		13.47	%	$	97,863	10.79	%	$	91,046		10.03	%
+300		78,772	11.54			78,064		9.95			95,112	7.68			88,698		7.19
+200		75,220	6.51			75,591		6.47			92,302	4.49			86,241		4.22
+100		72,345	2.44			73,113		2.98			90,010	1.90			84,195		1.75
0		70,622	—			70,996		—			88,332	—			82,747		—
−100		69,819	(1.14)			68,685		(3.26)			85,956	(2.69)			81,780		(1.17)

The table above indicates that as of ~~June 30, 2020,~~March 31, 2021, in the event of an immediate and sustained 400 basis point increase in interest rates, the Company would experience a ~~16.44%~~10.79% increase in net interest income. In the event of an immediate 100 basis point decrease in interest rates, the Company would experience a ~~1.14%~~2.69% decrease in net interest income.

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

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Company’s loan, investment, deposit, or funding strategies.

LIBOR Transition

LIBOR is used as an index rate for the Company’s ~~interest-rate~~interest rate swaps and caps, a portion of its subordinated debt, various investment securities and approximately 8.5% of the Company’s loans as of ~~June 30, 2020.~~March 31, 2021. It is expected that the number of institutions that have been reporting information used to set LIBOR will stop doing so starting after December 31, 2021 through June 30, 2023 when their reporting commitment ends. As a result, LIBOR may no longer be available as an index or may be seen as no longer representative of the market. Alternative reference rates are being identified, but existing contracts may not have been written to allow the use of these alternatives. The Company is evaluating the risks related to this transition and its evaluation and mitigation of risks related to the discontinuation of LIBOR may span several reporting periods through ~~2021.~~2023.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the design and operation of the Company’s “disclosure controls and procedures” (as that term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, or the Exchange Act) as of ~~June 30, 2020,~~March 31, 2021, the end of the fiscal quarter covered by this Quarterly Report on Form 10-Q. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of ~~June 30, 2020,~~March 31, 2021, the Company’s disclosure controls and procedures were effective to ensure that the information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

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

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

Item 1.A. Risk Factors

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

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

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

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

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

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

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

●

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

●

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

●

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

●

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

●

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

●

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

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

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

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●

~~requiring banks to focus on business continuity and pandemic planning;~~

●

~~adding pandemic scenarios to stress testing;~~

●

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

●

~~permitting certain regulatory reporting extensions;~~

●

~~reducing margin requirements on swaps;~~

●

~~permitting certain otherwise prohibited investments in investment funds;~~

●

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

●

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

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

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

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

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

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

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

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

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

March 11, 2021.

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

Issuer Repurchases of Equity Securities

The following table presents stock purchases made during the first quarter of 2021:

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Period	Total Number of Shares Purchased ⁽¹⁾	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs ⁽²⁾	Maximum Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs ⁽²⁾
January 1 - 31, 2021	16,618	$	12.50	16,618	$	14,499,391
February 1 - 28, 2021	—		—	—		14,499,391
March 1 - 31, 2021	354		15.89	—		14,499,391
Total	16,972	$	12.57	16,618	$	14,499,391

(1)

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

(2)

On January 22, 2019, the Company’s board of directors approved a stock repurchase program which authorized the Company to repurchase up to $15.0 million of its common stock, subject to certain limitations and conditions. The stock repurchase program was effective immediately and was subsequently expanded. On July 23, 2019 and October 27, 2020, the Company's board of directors approved $10.0 million and $15.0 million increases, respectively, to the stock repurchase program for a total authorization of $40.0 million. Additionally, on October 27, 2020, the stock repurchase program duration was extended to run through October 27, 2022. The stock repurchase program does not obligate the Company to repurchase any shares of its common stock, and other than repurchases that have been completed to date, there is no assurance that the Company will do so. Under the stock repurchase program, the Company may repurchase shares of common stock from time to time in open market or privately negotiated transactions. The extent to which the Company repurchases its shares, and the timing of such repurchases, will depend upon a variety of factors, including general market and economic conditions, regulatory requirements, availability of funds, and other relevant considerations, as determined by the Company. The Company may, in its discretion, begin, suspend or terminate repurchases at any time prior to the stock repurchase program’s expiration, without any prior notice.

Unregistered Sales of Equity Securities

None.

Use of Proceeds from Registered Securities

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

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SIGNATURES

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


	Bridgewater Bancshares, Inc.

Date: ~~August~~May 6, ~~2020~~2021	By:	/s/ Jerry J. Baack
	Name:	Jerry J. Baack
	Title:	Chairman, Chief Executive Officer and President (Principal Executive Officer)

Date: ~~August~~May 6, ~~2020~~2021	By:	/s/ Joe M. Chybowski
	Name:	Joe M. Chybowski
	Title:	Chief Financial Officer (Principal Financial and Accounting Officer)

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PART I FINANCIAL INFORMATION	3

Item 1. Consolidated Financial Statements (unaudited)	3
Consolidated Balance Sheets	3
Consolidated Statements of Income	4
Consolidated Statements of Comprehensive Income	5
Consolidated Statements of Shareholders’ Equity	6
Consolidated Statements of Cash Flows	7
Notes to Consolidated Financial Statements	8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	3429
Item 3. Quantitative and Qualitative Disclosures About Market Risk	6758
Item 4. Controls and Procedures	6960

PART II OTHER INFORMATION	6960

Item 1. Legal Proceedings	6960
Item 1A. Risk Factors	6960
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	7260
Item 3. Defaults Upon Senior Securities	7261
Item 4. Mine Safety Disclosures	7261
Item 5. Other Information	7261
Item 6. Exhibits	7362

SIGNATURES	7463



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

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


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


Exhibit Number		Description
~~4.1~~10.1		~~Indenture,~~Loan and Security Agreement, dated ~~June 19, 2020,~~March 1, 2021, by and between Bridgewater Bancshares, Inc., as borrower, and ~~U.S.~~ServisFirst Bank, ~~National Association,~~ as ~~trustee (incorporated herein by reference to Exhibit 4.1 filed with the Form 8-K on June 19, 2020)~~
~~4.2~~		Forms of 5.25% Fixed-to-Floating Rate Subordinated Note due July 1, 2030 (included as Exhibit A-1 and Exhibit A-2 to the Indenture filed as Exhibit 4.1 hereto and incorporated herein by reference to Exhibit 4.1 filed with the Form 8-K on June 19, 2020).
~~10.1~~		~~Form of Subordinated Note Purchase Agreement, dated June 19, 2020, by and among Bridgewater Bancshares, Inc. and the Purchasers~~Lender (incorporated herein by reference to Exhibit 10.1 ~~filed with the~~of Form 8-K filed on ~~June 19, 2020)~~March 5, 2021)
10.2		~~Form~~Revolving Note, dated as of ~~Registration Rights Agreement, dated June 19, 2020,~~March 1, 2021, made by ~~and among~~ Bridgewater Bancshares, Inc., as Borrower, to and ~~the Purchasers~~in favor of ServisFirst Bank, as Lender (incorporated herein by reference to Exhibit 10.2 ~~filed with the~~of Form 8-K filed on ~~June 19, 2020)~~March 5, 2021)
10.3		Pledge Agreement, dated as of March 1, 2021, by and between Bridgewater Bancshares, Inc., as borrower, and ServisFirst Bank, as Lender (incorporated herein by reference to Exhibit 10.3 of Form 8-K filed on March 5, 2021)
31.1		Certification of the Chief Executive Officer required by Rule 13a-14(a) of the Securities Exchange Act of 1934, and Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certification of the Chief Financial Officer required by Rule 13a-14(a) of the Securities Exchange Act of 1934, and Section 302 of the Sarbanes-Oxley Act of 2002
32.1		Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2		Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.1		Financial information from the Company’s Quarterly Report on Form 10-Q for the quarterly period ended ~~June 30, 2020,~~March 31, 2021, formatted in inline XBRL interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Income; (iii) Consolidated Statements of Comprehensive Income; (iv) Consolidated Statements of Shareholders’ Equity; (v) Consolidated Statements of Cash Flows; and (vi) Notes to Consolidated Financial Statements
104		The cover page for Bridgewater Bancshares, Inc’s Form 10-Q Report for the quarterly period ended ~~June 30, 2020~~March 31, 2021 formatted in inline XBRL and contained in Exhibit ~~101.~~101